Don't try this at home. How credit card arbitrage funded my first company.

 

Getting a startup off the ground takes time, talent, and money.  Time can be stolen from various parts of your life with some determination and prioritization. Talent can be eventually learned or acquired with cofounders.  Money's different.  You can do a lot of things to reduce the need for money, but it usually takes some capital to get your idea off the ground initially.

I still remember the night I met with my 2 cofounders of my first company to talk money.  We had been working on Openvote for about 6 months while in business school together.  It was our first startup,  and so far, it had been super fun.  We had a vision for changing the world, and we weren't afraid of the hard work or the low likelihood of success.  I remember this particular evening in part because the weather was horrid.  We were sitting in our bud's living room in New Hampshire with a wind howling outside.  Though warm inside, we were all very tense.  With no technical cofounders onboard (I was so silly in those days!!), we needed money to hire coders.  With a few other items budgeted, we had determined that our startup needed a bare minimum of $20k to get off the ground.

One of our co-founders came to the conclusion that he couldn't put any money into the company.  With a wife and a kid on the way, he couldn't justify any financial risk.  He also couldn't go without a salary.  It was a really painful moment, but we had to cut him loose as a cofounder.  I hold no judgment.  Startup drag coefficients are very real.

My other cofounder was able to come up with $4k, but couldn't risk anything more.  We agreed that I would be responsible for the last $16k.

For some personal background, I do come from a financially stable family.  My parents could have covered the $16k to help me follow my dreams.   But I didn't ask them (and neither did they offer).  The financial pressure and responsibility of my startup was to be fully on my shoulders. 

But I didn't have the $16k or anything close.  I had spent the first part of my twenties working at summer camps, pulling in a whopping $31k a year.  Then, I went to business school where all my friends had expensive tastes in restaurants and vacations.  At this point in my life, I had access to about $5k in cash and was substantially in debt with loans.  That $5k was already not enough to fund my personal expenses for the rest of business school.  I budgeted that I needed $22k to cover the startup and my personal costs.

I could have gotten a normal MBA-type internship and earned a bunch of money.  But I was also impatient.  I knew that our startup had momentum and delaying for any reason was off the table for me.  

 

And, so I raised my money through credit card arbitrage: $22k across 14 different cards. 

 

Financing problem solved.  Now we could continue with building our startup.  Of course, I knew that debt never solves money problems, it just delays them.  But for a startup at embryo stage, delaying problems can be nearly as good as solving them.  I'm going to tell you how I did it, but first, my quick disclaimer.  I don't ever recommend this strategy to anybody. Fucking around with credit card debt can do bad, bad things to you.  But if you insist...

How to Play Credit Card Arbitrage

 

Research the fuck out of credit cards
If you're going to do this strategy, you need to make yourself the world's expert on credit card terms and conditions.  You're playing with fire with credit card companies.   A big part of their business model is built on deceiving customers with hidden terms.  This, this, and this should get you started.  Pay close attention to the risks.  Be careful in your reading.  Most sites that talk about this stuff are monetizing through credit card affiliate fees.  (FYI—I have zero affiliate or monetized links in this post).

Check your credit score
Go ahead and get all your credit reports.  You get them free once a year.  Fix any mistakes and make sure that your credit score is as good as it can be for the time being.  While you're at it, research the fuck out of credit scores.  This, this, and this should get you started.

Find introductory APR credit cards
The game of credit card arbitrage is played because many banks offer introductory 0% APRs for the first year.  They also often offer a few courtesy checks with low cash advance fees of somewhere around 3%.  This means you can write yourself a check for a 3% transaction fee and pay it back within a year with no further interest.

Apply for all the cards all at once
Once you start increasing your credit, your credit score will drop.  But there's a lag in processing the change.  If you apply for a whole bunch of cards at once, your credit decisions will all be based on your original score.  You can stagger them a bit to increase the time you get for credit card arbitrage and to take advantage of account balance transfers which are often initially 0%; however, you risk getting denied for cards or receiving very low credit limits.

Put your cash into interest bearing accounts
I recommend uber risk-free accounts.  I usually just stick with ING's money market savings account.  The point is not to create wealth with this investment, but to help cover the transaction costs.  Your high-beta gamble  is on yourself and your startup. 

Sign up for automatic minimum payments
You'll need to cover the minimum payment every month. Set up to have each of them paid automatically out of your bank account.  It's really easy to fuck everything up if you're not super organized. 

Set the clock for repaying your credit cards
You have 12 months to pay everything back.  Get cranking on something that makes money and get yourself out of this trouble you've created for yourself...

 

 

So, yeah.  That's about it.  For me, it worked out both terribly and perfectly.  The terribly part is that our startup failed, and I never paid myself enough to pay the cards back.  At the end of Openvote, I was saddled with all this credit card debt, plus opportunity cost loss from no salary, plus no job.  It was a tough time.  Even though I was exhausted from the startup's failure, I had earned myself 6 months of working days, nights, and weekends on boring consulting jobs just to get back to even.  It sucked.

But I don't regret it for a second.  It many ways, it worked out perfectly.  It was during that really tough time that we founded FlightCaster.  I had learned just how much I love startups, and it was no longer based on some romanticized view of entrepreneurship.  My friends that deferred their startup dreams for high-paying consulting jobs got no closer to learning how to build a startup and, worse, became accustomed  to the life that a high salary affords. 

I, on the other hand, learned that the risk and hardship of startups and debt were worth it because I was happy.  And, as a Mastercard customer 12 times over, I can say confidently that that shit is priceless.

A Caveat:  Don't do this.  Don't do any of it.  Learn how to code so you don't need to hire programmers.  Get yourself into one of the bagillion incubators out there.  Find a part-time job that you can do to make money on the side.  Do something.  But whatever you do, don't fool yourself into believing that lacking $15k is what is preventing you from doing a startup.

Find discussion of this post on Hacker News.

***

And please come check out my new startup, 42Floors

 

We're fixing commercial real estate.  Forever.


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And finally, if you're searching for office space in the Bay Area right now, let me know and we'll go to the ends of the earth to help you!

******************
I'm Jason Freedman.  
I've got a sweet-ass new company: 42Floors.  
Previously, I did FlightCaster.
I welcome connections on Linkedin,  FacebookAngel List and Twitter.