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Grand PlansAuthor: Donna Fenn
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If you're starting a company with $1,000 or less, you may find it hard to keep a straight face. In an era of stunningly low unemployment and long-running prosperity, you're likely to bump into the perception that almost anyone in the United States could scrape together much more than a thousand bucks, if not from personal savings then from a well-heeled aunt or uncle. And if you've got only $1,000 to sink into your business, can you expect to get it off the ground when it costs more than that to buy a decent laptop and printer? In this day and age, are there any real bootstrappers left? The answer is yes. Not that their lot is an easy one, of course. Still, some people pull it off. In tried-and-true fashion, they work incredibly hard; they are amazingly resourceful. Though some of the bootstrapping basics never change, every era offers its special opportunities. And in looking at companies started with $1,000 or less that have achieved at least $1 million in annual revenues, Inc. has identified seven paths to bootstrapping success peculiar to the 1990s. Those paths relate to changing economic and business patterns--tectonic shifts like the outsourcing of services and the downsizing of the workforce. In such trends many bootstrappers have found their big break, as exemplified by the company stories that follow. PEEL OFF A DEAL A business-management commandment of the '90s: Don't do in-house what an outsider can do better for you. In other words, thou shalt outsource. The commandment means opportunity for employees-turned-bootstrappers. In 1994, Richard Maradik, then 25, was head of fund-raising for the Tennessee Republican Party, and 23-year-old Jay Graves was its information-services manager. Together they developed a sophisticated database to aid in their direct-mail fund-raising. "We went 10 demographic categories deep into each person," recalls Maradik. "We knew their household income, what kind of car they drove, and what magazines they read." That was a big election year in Tennessee, with contests for the governor's office and two U.S. Senate seats. Maradik and Graves's direct-mail wizardry helped yield an extraordinary $3 million for the Republicans, elevating the men to star status in the GOP firmament. "Because of the work we did," Maradik says, "Republicans came to us from around the country saying, 'We want you to do this for us.'" So they did. On January 1, 1995, with blessings from their former employer, Maradik and Graves quit their jobs and, within days, deposited all of $15 in a checking account and persuaded a former GOP vendor to put his spare storage room at their disposal at no charge. Equipped with a card table and two phones, the two men were soon in business as DataMark Inc., a direct-mail database-marketing company. They peeled off a deal from their former employer, which hired them to do what they had been doing before as employees, and they signed on the Illinois Republican Party and two Nashville businesses as customers as well. "We got them all to pay us effective January 15," Maradik adds. Fixated on cash flow, the founders often waited only five days after invoicing a customer before following up by phone. "For the first couple of years our average receivable was 21 days," says Maradik, who offered customers swift-payment discounts. The company's 26 employees now work out of an office in a warehouse complex near the Nashville airport. While political work still accounts for 30% of its sales--in 1998 the total was $4 million, to 200 customers--DataMark has strategically diversified into the health-care, insurance, and retail industries. "We never wanted to be a political direct-mail company," Maradik says. "It's too volatile, and it doesn't create value." MOOCH OFF A UNIVERSITY No wonder so many hip young entrepreneurs want to start a business in a university dorm room. The rent is paid, all-nighters are a way of life, and a host of resources are there for the taking. Bill Martin and Greg Wright, buddies since high school, were playing a round of golf on a New Jersey course in the summer of 1997 when a thought hit them like a bolt of lightning: why not parlay their passion for the stock market and the Internet into a business? That fall the then 19-year-old Martin returned to the University of Virginia; Wright, then 20, started his junior year at Rutgers. But that didn't prevent them from pursuing the business they had envisioned. Actually, it helped. They had an extraordinary resource in where they were living. With free, unlimited access to their universities' T1 lines to the Internet, they created a Web site with a message board where their friends could chat about stocks. In the back of their minds, they hoped to generate revenues by attracting advertisers to their site. They didn't have to spend much money. They plunked down $75 for a New Jersey partnership fee, $70 to register their Web domain name, and $30 for the first month's hosting fee for their Web site. Wright oversaw the operational and technical aspects of building the site, relying heavily on his roommate, who was studying computer science. "He learned a lot about Web applications, and he'd come back and apply that to our site," says Wright. "He once did a page design and then handed it in as a class project." Meanwhile, Martin was drawing on his contacts at the University of Virginia to develop content for the site. As a member of a student investment club--which John Griffin, the founder and president of Blue Ridge Capital, a hedge fund in New York City, had funded with $100,000--he met students who shared his interest in Wall Street. Fellow club members were happy to contribute financial articles and company profiles for the fledgling Web site, called Raging Bull. One club member who was particularly jazzed up about it, Rusty Szurek, was quickly enlisted as Martin and Wright's partner. The site enjoyed modest success for the first few months. It attracted a few thousand or so daily hits, or page visits, and drew a sprinkling of paid advertisements. But compared with such high-traffic, investment-oriented sites as the Motley Fool, Silicon Investor, and Yahoo Finance, the business remained bush-league--until the partners conceived of an "ignore" button. "We noticed that the biggest problem with message boards was spamming: people being vulgar or just dumb," says Wright. "We wanted people to enjoy what was valuable without worrying about the other stuff." So Wright recruited another Rutgers student to devise an "ignore" feature that would allow users to block out messages they considered to be dull or offensive. The reconstituted site attracted so many users that it galvanized @Ventures, a venture-capital firm based in Andover, Mass., to invest $2 million in the start-up. Wright, Martin, and Szurek don't have to mooch off their universities anymore; in fact, they dropped out of school to devote themselves full-time to Raging Bull, now a multimillion-dollar company based in Andover, Mass. And now it's the academic community that's tapping the Raging Bull partners for their expertise. A Rutgers professor invited Martin to speak to a finance class, and Szurek recently lectured at Boston College. WALK THE PLANK Whether they are sacked owing to "downsizing," "reengineering," or some other business or economic trend, many employees have come to know the '90s as the Decade of the Pink Slip. For some it's been a blessing in disguise. In the spring of 1996, Neil Sater, then 40, and his brother-in-law, David Zasloff, then 25, were laid off from their jobs as carpenters at Barron Development, a construction company in Santa Maria, Calif. The reason for the layoffs was a downturn in residential construction in the area. "I was in pretty dire financial straits," says Sater, although his situation could have been worse. His wife's salary as a teacher would afford him some time to look for the right business opportunity. That idea presented itself, oddly enough, at a local greenhouse, where an unusual fountain consisting of "a monolithic slab of slate with water running over it" caught Sater's eye. A lighter, more portable version, he reasoned, might have commercial potential. He spent the princely sum of $50 on raw materials. "David and I started fooling around on my back patio, gluing pieces of slate together and leaving the inside hollow," Sater recalls. Among the objects they fashioned from the slate cubes were fountains and furniture, including side tables. In exchange for a fountain, Sater bartered with a local photographer to shoot a portfolio showing the prototypes. On the strength of the portfolio Sater secured orders from several gallery owners in Sedona, Ariz., a spot known for its artists' community, while he was on a trip there. Soon Sater and Zasloff were crafting more designs, building five fountains at a time, packing them into Zasloff's Isuzu Rodeo, and showing up unannounced at galleries in the San Francisco area. Their big break came in February 1997, when their company, named Water Wonders, "put everything on the line," in Sater's phrase, and spent $2,500 for a booth at the San Francisco International Gift Show. It paid off: Water Wonders received $50,000 worth of orders over five days, with Sater's 13-year-old niece scribbling down specifications on the back of business cards. By the time the two partners returned to Santa Maria, Water Wonders was well on its way to exponential growth. By the end of 1997 the company employed 12 people and was celebrating its $690,000 in revenues for that year. Last year it posted $2.8 million in sales, and the projection for this year is $8 million to $10 million. Now employing 60 people, Water Wonders sells fountains through mail-order catalogs and at retail chain stores and galleries nationwide. MORPH INTO A CONSULTANT Consultants are hardly an invention of the '90s, but they've reached their full flowering in this decade. What better way to bootstrap than to hang out a consultant's shingle? James H. Fitzgerald recalls sitting across from the man with the dark glasses and the amethyst pinkie ring. "Where didja say ya live?" Fitzgerald quotes the man as asking. It was 1991, and Fitzgerald, then 24, was working as assistant to the vice-president of a large New York City hotel. The man in the dark glasses represented the company that had the hotel's garbage-disposal contract, and Fitzgerald was politely suggesting a reduction in weekly pickups, based on his conclusion that the hotel was paying for twice the number that it needed. In confronting the contractor, Fitzgerald says, he "encountered resistance from fellow executives" at the hotel because of the widespread perception that organized crime controlled the city's garbage-collection business. "They told me I'd end up dead," Fitzgerald recalls. In the end, he says, his tenacity resulted in a 50% reduction in the hotel's garbage bill, from $700,000 to $350,000 a year, and earned him some notice in the local press. Later that year, when new managers took over the hotel, Fitzgerald left to launch Envirotron USA, a waste-management consulting company. He set himself up with a beeper, voice mail, and a post-office box. His total start-up cost: a few hundred dollars. His first customer was the Omni Berkshire Place, where a manager had heard about his earlier cost-cutting coup and approached him about a consulting job. One hotel job led to another. Before long Fitzgerald was also rooting through garbage at chain stores as part of his waste-auditing service. "I figure out how much waste a company is producing and make sure they're not being overcharged for garbage and underpaid for recycling," he says. He also finds treasure in trash, selling cardboard and plastic materials that might otherwise be discarded. Although he initially charged customers one-third of the savings he helped them achieve, Fitzgerald quickly realized that the ticket to success was to offer a complete outsourcing option to his clients. Now he charges a management fee to handle all accounts payable and operations support for trash collection. With five employees and 15 major customers, including Bear Stearns and White Castle, Envirotron racked up $1.6 million in sales last year. According to Fitzgerald, Envirotron has been profitable from day one. RUSH THE NET It's a cliché of our times: geek sits down at computer, creates an Internet-related business, and a year later emerges from his bedroom as a multimillionaire. Like all clichés, there's some truth to it, including variations on the theme. The origins of Robert Voit's business date back to 1990, when he was a 30-year-old pilot for Northwest Airlines. On his days off he dabbled in his hobby: digital imaging. He liked to tinker with software that allowed him to edit digital photographs and "paint" images with his computer. By and by, he came up with a graphic-utilities-software program and offered it as shareware on electronic bulletin boards. Users were invited to download the shareware, called Paint Shop, and payment was on the honor system. Voit's start-up costs? The price of paper, envelopes, and stamps, says Voit, who bought the supplies so that he could send an encryption code to customers who had paid him for Paint Shop. With the code, users could disarm an electronic message embedded in the software that badgered them to pay up. Although Voit incorporated his company, Jasc Software Inc., in 1991, he continued to fly for Northwest for four more years. "I'd go flying, come home, and have a backlog of orders," he recalls. In April 1992 he hired an assistant to answer the phone and fill orders, which freed him to write more code. The advent of the Web caused Voit's business to soar. Based on users' feedback, he created a new version of Paint Shop, which he dubbed Paint Shop Pro and continued to sell as shareware. Without the Internet to turbocharge his marketing and distribution, Voit says, he probably would have needed a "six figure" investment to pursue an alternative strategy. But by 1997 Voit had reached a plateau and decided to substitute catalogs and retail stores for the Web as his distribution channel. By then Paint Shop Pro had made its mark. His company had 80,000 paid users and 40 employees on the payroll, its revenues had climbed to a staggering $6.5 million, and its product had won kudos in the trade press. Distributors welcomed it with open arms, he says. In 1998 Jasc Software ranked #161 on the Inc. 500 list of America's fastest-growing private companies, and its sales continued to explode, totaling $17 million by year's end. HOLE UP AT HOME Working from home once had all the cachet of selling pencils on the sidewalk. But the '90s changed all that. Now bragging rights come with starting a business in a basement, laundry room, or spare bedroom. Not only did Michael Knowles start his security-guard staffing company in the guest room of his house in Tallahassee, Fla., but he didn't relocate it to larger quarters for two years. Knowles, a former army sergeant, had worked for a friend's security company. In November 1993, at age 42, he decided to start his own. Borrowing $1,000 from a buddy, he founded Seven Hills Security Inc. The money covered the cost of a license, uniforms, and liability insurance. Knowles shared the house with his wife, Evelyn, who served as de facto receptionist, and his cocker spaniel, whose enthusiastic yelps in the background often interrupted business calls. But unlike some home-based entrepreneurs, Knowles never pretended to be anywhere else, even when he was pitching his company in the most professional light to prospective customers. "I'd be honest and tell them I was working out of my home," he says. "People appreciated me for handling it that way." To support his family during the lean start-up period, Knowles took a job as a security guard at a local hospital, working until 11 p.m. and making $7 an hour. "I'd get up at 8, sell like crazy on the telephone until 2, go to work at the hospital, come home and go to bed, then get up and do it again," he says. When Seven Hills landed its first contract, from a local car dealership, Knowles performed the work himself, adding a shift to his workday from 11 p.m. to 4 a.m. Most nights he slept two to three hours. In early 1994 demand for Seven Hills security guards had increased enough that he was able to quit his hospital job and hire his first employees. Still, he was adamant about keeping the business at home. "Office space was expensive, and I wanted each part of the business to pay its own way," he says. He compensated for the lack of office space by floating from job site to job site, where his employees would hand in their time sheets and collect their checks. The car lot of one of his customers functioned as an open-air forum for discussing company business. The customer "didn't mind at all that there were more security guards around," says Knowles. His frugality paid off. Seven Hills Security is now situated in a 20-room suite in a contemporary office complex in Tallahassee, employs 130 people full-time, and last year produced $2.1 million in revenues. That year it ranked sixth on the Florida 100, a list of the state's fastest-growing companies that's compiled by the University of Florida. And last spring Seven Hills Security (now called International Security Solutions) merged with three other companies, including International Research Bureau, a pre-employment-screening agency owned by Darrell Goodwin--who, as it happens, started his business out of a garage with $1,000. CROSS THE BORDER With foreign trade on the increase and technology easing access to overseas markets, the mantra for businesspeople is, Think globally. Some bootstrappers are doing more than thinking. Even back in 1992, when Liz Elting and Phil Shawe started TransPerfect Translations Inc., their goal was as ambitious as it was clear-cut. They wanted to build the largest foreign-language-translation company in the world. It was a remarkably lofty aspiration, considering that they were still graduate students living in a New York University studio apartment and subsisting mostly on Ramen Pride Noodles and Kraft Macaroni & Cheese. Elting and Shawe's hopes rested on a basic premise: that the increasing globalization of business and the growing use of information-systems technology would vastly ramp up the demand for foreign-language translation. Before entering NYU's Stern School of Business, in 1990, Elting had worked in the marketing department at Euramerica Translations Inc., a large translation company also in New York City. She remembered that some customers had grumbled about missed deadlines and poor quality, and she believed that there was room for competition. Euramerica was an exception in an industry known for mom-and-pop companies. In launching TransPerfect, Elting, who was then 26, and Shawe, who was 23, were unlikely entrants into the market, and they plunged into it with an unusual strategy. Neither was a linguist. Elting's specialty was international business and marketing. Shawe, who had worked at Chemical Bank, had experience in finance, as well as risk management and marketing. Rather than translating foreign-language materials themselves, they decided to outsource everything. They would position TransPerfect as a company that would do its best to accommodate any language, any turnaround time, and any volume of work, relying on professional translators, editors, proofreaders, desktop publishers, and interpreters--all hired as temporary workers for each job. The virtual company they created consisted of little more than a rented computer and a fax machine (total start-up costs: $150 to cover the first payment on a leased PC and to install a second phone line), plus themselves. The work came in dribs and drabs, as Shawe cold-called Fortune 500 companies with overseas operations and Elting worked her contacts to recruit freelance translators. But in 1993, Cyprus Amax Minerals, a large mining company, seemed to call the partners' bluff: could they translate a 600-page mining feasibility study to be presented to the Russian government in nine days? Shawe and Elting scrambled to line up nine native Russian speakers with mining expertise. Installed in Elting and Shawe's apartment, the translators labored in eight-hour shifts. "One was at our kitchen table, another was on the couch, and another was at the desk," recalls Elting. TransPerfect finished the project on time, leading to $400,000 worth of additional business with Cyprus Amax. TransPerfect has grown into a $15-million company with 85 employees, mostly account executives and project managers, scattered among its 11 offices in the United States and 3 in foreign countries. (A fourth overseas office, in Paris, is scheduled to open in September.) But the vast majority of the company's workers are still freelancers. Donna Fenn is a contributing editor at Inc. Researcher Anne Marie Borrego provided additional reporting. For more on bootstrapping, see "Shameless Ploys," below.
The Accidental Bootstrapper One way to start a business without spending a lot of money or agonizing over strategy is to follow Michelle Lemmons-Poscente's example. Not that you could set out to follow her example; she started her company pretty much by accident. Seven years ago Lemmons-Poscente was a struggling independent film producer in Los Angeles, scrambling for a second job to pay the bills. She answered a classified ad in Variety placed by two people--a humorist and a tax strategist--who were both looking for an agent to market them as public speakers. Although Lemmons-Poscente had no experience of the kind, she talked her way into the job. "Selling comes naturally to me," she explains. She succeeded in booking several engagements for the tax strategist, earning an hourly rate plus commissions. Then in September 1992 she moved back to her hometown of San Angelo, Tex., to help care for her father, who was critically ill. Reckoning that she might still earn some bread money as a booking agent, she borrowed $1,000 from the tax strategist and bought a cheap computer. Operating out of a spare bedroom in her parents' home, she cold-called state associations and chain businesses, still hustling to cover expenses. "It's a small town, so I could set up accounts," she recalls. "If I had done this in L.A., they never would have printed my letterhead without my paying for it first." To earn a bit of quick money, she gathered pecans from her front lawn for sale at a local farmers' market. Slowly, her work as a booking agent caught on--her first break was signing Charles Kuralt to speak at a Super 8 Motel conference--but she viewed the work as a way to make ends meet while looking after her father. In 1993, a few months after her father's death, Lemmons-Poscente moved to Dallas. She kept a hand in the film business while frugally expanding her speakers' agency. In mid-1994, Lemmons-Poscente had her epiphany: "The real gem was right under my nose. I said, 'I'm not in the film business. I'm in the speakers' bureau business, and that's what I enjoy.'" Now her company, International Speakers Bureau Inc., employs 20 people and projects it will make $7 million in sales this year to such customers as Sprint, IBM, and Microsoft.
The Classic Bootstrapper: Turning a borrowed $20 into a $30-million powerhouse A candlemaker's frugal ways recall the bootstrapping techniques of yesteryear Don't look to Paul Aldrich for clues on how to bootstrap in the new economy. His is a tale of classic wisdom. Aldrich, who lives in Topsham, Maine, started his company in 1992 with $20 borrowed from a friend. Applying copious amounts of Yankee ingenuity, frugality, and hard work, he grew his business to $30 million in annual revenues after seven years. From his story emerge seven timeless bootstrapping rules: RULE ONE: Defy adversity. Aldrich had been without steady employment for two years when he began, at age 38, to indulge a candle-making hobby at his kitchen table. His hot-tub distributorship, Heaven on Earth Hot Tubs, had gone bankrupt in 1990, and Aldrich had applied for as many as 20 to 30 jobs a week. "I was losing out to people with master's degrees for menial management jobs," he recalls. His wife, Sally, supported the family on her $50,000 nurse practitioner's salary and moonlighted on the second shift at a local hospital. To pursue his candle-making, Aldrich borrowed $20 from a family friend to buy wax, fragrance, and dye. RULE TWO: Know an opportunity when you see it. "I would give the candles away to family and friends, and they would ask for more," says the soft-spoken Aldrich. "I was so excited about making candles that sometimes I'd wake up at 3 a.m. and start melting wax." Yankee Candle, now a $185-million company in South Deerfield, Mass., was then the best-known American candlemaker. Aldrich differentiated his products from Yankee's by using square, rather than round, containers and by fitting his candles with two wicks instead of one. He began selling them at local crafts shows. RULE THREE: Look for freebies everywhere. Like every good bootstrapper, Aldrich didn't allow his limited resources to dissuade him. He researched glass manufacturers in the Thomas Register, a directory of corporations organized by product, calling only those with 800 numbers. Identifying himself as a candle manufacturer, he would cajole them into giving him free samples. "Every day the UPS truck would drop off containers of glass," says Aldrich. RULE FOUR: Carpe diem. On a trip to Florida in December 1992, Aldrich acted on a whim. "I was driving through the Poconos, and I saw billboards for a candle store," he recalls. "So I stopped in and told the owner that I had a bunch of candles in apothecary jars that I was giving as Christmas gifts." The owner trudged out to Aldrich's Dodge Caravan, took one look at the candles, and told Aldrich to call him as soon as he returned to Maine. "He was my first customer," says Aldrich. "It was a $3,400 order." RULE FIVE: Draft your family and friends. Aldrich and his wife set up production in the kitchen of their three-bedroom split-level home, enlisting weekend help from family and friends, who were "paid in candles." Even Aldrich's seven-year-old daughter pitched in, as did his two older daughters, on weekends. "I'm sure we violated child-labor laws," Aldrich quips. Neighbors commented on the aromas wafting from the Aldrich home, but few had any idea that the family was running a full-blown business in the residential area. "I'd have to load the candles in my minivan and go meet the trailer truck at the edge of the neighborhood," Aldrich relates. The one time he tried to sneak a truck into the neighborhood, the driver blew his air horn at 6 a.m., virtually blasting Aldrich and his neighbors out of bed. RULE SIX: Think of cash as king. Like many entrepreneurs who are initially strapped for capital, Aldrich never forgot his early cash-flow lessons. He has always ranked his customers as an A, B, or C, according to how quickly they paid him. In the peak season, he'd take care of his A customers--those who paid him within 35 days--first, which lowered his average accounts-receivable turnaround to 36 days. (Aldrich's research revealed that the industrywide figure at the time was 42 days.) That speedy return, coupled with the 45-to-60-day payment terms that he negotiated with major suppliers, secured a critical cash-flow edge in his favor. RULE SEVEN: Remain true to your humble beginnings. Since Aldrich took on a manufacturer's representative to market his candles at gift stores throughout New England, Village Candle's annual growth has averaged more than 100%. But Aldrich has remained cautious. "We only grew within our means," he says. "I could have grown the company 200% to 300% a year if I had wanted to borrow money, but then you lose quality control." Thoroughly committed to using internal financing, Aldrich has rejected overtures from bankers wanting to lend the company money to fuel faster growth. "Our philosophy," he explains, "has always been to build the business one brick at a time."
SHAMELESS PLOYS If you've got chutzpah, do you need money? Well, yes, but chutzpah sometimes can compensate for a lack of resources. And sometimes poverty may leave an entrepreneur little choice but to try a boldly desperate act. No wonder, then, that bootstrapping lore abounds with tales of shameless ploys. Some examples:
URL: www.inc.com Reprinted by permission. |
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