Times have changed. Business basics remain the same — growing businesses need funding to invest in product development and to attract new customers. The current slowdown in venture capital and other private equity funding is motivating many businesses to evaluate a wider range of financing alternatives and to develop new and innovative financial plans.

The year 2001 went into the books as the third highest volume year for venture capital investing, with a total of $35.6 billion invested across the United States. But that coincided with an unprecedented number of “down rounds.” Fully 80 percent of last year’s equity financings were at lower share prices than before, mirroring the sharp decline of the stock market as a whole.

“After backing us with several million dollars in ‘A’ and ‘B’ rounds, our investors proposed terms for the next round we wouldn’t even consider,” reports the chief operations officer of a 3-year-old startup that has just started making profits. “Our CEO decided to pass on outside equity.”

Alex Denoble, who teaches entrepreneurial management at San Diego State University, says, “I have had to revamp the entrepreneurship classes to reflect the new reality. We are introducing a lot more about bootstrapping — growing your company from the ground up.” As veteran financier Martin Pichinson of Sherwood Partners in Los Angeles describes it, “Bootstrapping is about staying up long enough to win.” Fortunately, so many alternatives are available that there is something right for almost every viable business with a commitment to stay in business.

Old, New, Borrowed And Blue

Bootstrapping businesses are rediscovering two classic financing vehicles used to stretch a business budget — factoring and leasing. Factoring — borrowing backed by accounts receivable — “is good for companies that are unable to get lines of credit from a bank. We act as their credit and collections department,” explains Larry Steager, operations director at Primary Funding Corp. Leasing, long popular for equipment such as trucks and computers, also is being tapped as an additional source of funding. “Companies that don’t yet have venture capital backing can get vendor leases for equipment or lease facilities under guarantee,” says John Otterson, managing director of San Diego Venture Capital at Silicon Valley Bank.

After completing a round of venture financing, venture leasing can provide a new alternative. “For anyone interested in maintaining their share of ownership in their company, venture leasing is the answer,” advises Richard Walker, principal of Capital Equipment Leasing in La Jolla, who finds it an effective strategy to conserve the use of private equity. Walker says venture leasing can extend the time a firm has to seek a new equity infusion from one month to one year — time during which new discoveries and new customers may make the company more valuable. One the first startups to use venture leasing was Hotmail, which parlayed a $300,000 venture capital investment into $400 million when it was sold to Microsoft in 1997.

For more established companies, conventional borrowing is taking on a new role. Wells Fargo Bank has developed a microloan program for small businesses and Silicon Valley Bank is making working capital loans to companies that have completed a series “C” venture capital financing round and have growing revenues. For larger companies, ProFinance of La Jolla is providing an interesting alternative. It arranges loans secured by the expected returns of a business instead of traditional formulas used by commercial banks which depend upon the inventories and other assets a company reports on its balance sheet. ProFinance clients can raise additional sums ranging from $250,000 to several million dollars, reports executive Michael Jones.

For San Diego companies, the U.S. Navy is at attention for business growth. SPAWAR, the Navy’s local research center, has opened a Small Business Center in Old Town, providing workshops and free exhibit spaces at trade fairs. One local success story is RAM Laboratories Inc., whose chief executive, Richard McDonald, reports that “the SPAWAR Small Business Center was instrumental in launching our company.” McDonald cites the benefits of SPAWAR’s small-business set-asides in procurement contracts and the goodwill of having SPAWAR as a reference customer. Last year, SPAWAR, RAM Laboratories’ first customer, awarded RAM a two-year, $5.6 million contract for research and development into next-generation simulation architectures.

Help From Friends And Family

Friends and family have long been a popular source of additional funding for growing businesses. Bootstrapping is extending the circle of friends and family in the best American tradition.

Your best friend may be your best customer.

SDSU’s Denoble has been impressed by the success of three local startups that obtained working capital by extending prepayment discounts to their customers. Customers or potential corporate partners can also provide valuable in-kind amenities or consulting by industry experts, says local venture capitalist Peter Bissinger of Novartis BioVentures. Bissinger also praises the initiative of Arizeke Pharmaceuticals, which financed part of its startup operations with an externally funded feasibility study.

Your family of employees also can be a promising source of capital for growth. SAIC founder Robert Beyster started the Foundation for Enterprise Development in San Diego 15 years ago to support employee ownership with helpful information and consulting on individual employee ownership plans. The Foundation for Enterprise Development’s next annual conference on employee ownership will take place March 4 to 6 here in San Diego.

Other civic and industry organizations also provide bootstrapping businesses with useful programs. The San Diego Regional Technology Alliance has assisted dozens of local area companies in applying for California Technology Investment Partnership grants of up to $250,000 to commercialize their innovations. SDTRA’s sister organization, LARTA, recently published “The 2002 Federal Technology Funding Guide,” a comprehensive source of information. The San Diego Council of the American Electronics Association has started a new program called “Partnering with Technology Giants,” which began with introductions to investors from Motorola and Intel. The AEA also organizes financial conferences exclusively for privately owned companies to meet with potential investors and providers of growth capital. The next event will be held March 6 in Palo Alto.

Now also is a good time to get reacquainted with your rich uncle — Uncle Sam that is. All federal agencies manage Small Business Innovation and Research grant programs. The SBIR programs parcel out more than $1 billion annually to provide up to $850,000 in early stage R&D funding directly to small technology companies or individual entrepreneurs who form a company. SBIR Fast Track also can match $1 to $4 in SBIR funds for every $1 the outside investors secure. Local companies that want to get on the fast track to SBIR dollars are in the right place at the right time. The National SBIR Conference will be held in Anaheim March 11 to 14 with workshops designed to help applicants make the most out of SBIR resources.

Aldea Communications of Carlsbad, publisher of the “NetPages” guide to the Internet, used SBIR grants to fund its research until the company became a good prospect for outside investment. Chief Executive Susan Estrada encourages other entrepreneurs to travel her route. “A lot of the success in writing proposals is knowing what the agencies want and getting support from the business community,” she says. “As long as you have a good idea, you have a good shot.”

The Small Business Administration can arrange loans of up to twice the amount currently invested in qualified small businesses through participating institutions such as San Diego National Bank and CDC Small Business Finance. The SBA loan program allows growing companies to obtain rates that are exceptionally competitive compared to alternate forms of financing.

Several foreign governments are seeking to woo promising businesses with cash startup assistance to add to the volume of innovative businesses locating in their country. Rory Mullen of Los Angeles-based Invest in Ireland offers California companies assistance in applying for grants of up to $10,000 per new job for new business operations in select areas of Ireland. The California Export Finance Office also supports international expansion with highly competitive credit programs.

Virtually Unlimited Possibilities

The Internet is giving local businesses the power to bootstrap on a global scale. ACE-NET, the SBA’s Angel Capital Electronic Network, is designed to help small companies looking for outside investors.

Multinational companies also are leveraging the Internet to back research by innovative companies. Eli Lilly’s Innocentive subsidiary is offering up to $100,000 per project to researchers who can solve one of the dozens of research challenges registered at its online clearinghouse, www.innocentive.com. BMW’s Innovation Management Group and Palo Alto Technology Transfer Center are also using the Internet as a first point of contact with technology startups in search of promising R&D projects they can support. The Web site is www.bmw-tech.com.

Bootstrappers don’t need to go it alone. Many capital providers routinely provide financial advisory services as well, professionally evaluating the many alternatives while a business and its employees tend to the business of growth. ProFinance, for example, provides interim financial management services and Sherwood Partners is retained by company management or board directors on a weekly basis to help implement financial plans that conserve resources for future growth. When you decide to build your company from the ground up, there’s no limit to how far you can grow.

Max Donner is contributing editor at the San Diego Metropolitan and a frequent contributor to leading European publications including Capital, Focus, Money and Folio magazines.