Most entrepreneurs would love to start their businesses with winnings from a lottery jackpot, a million-dollar inheritance from Great Aunt Martha or a large gift from investors who will give you all the time in the world to turn a profit and expect no share of the business in return. Now, that really is a dream. The tough reality is that to survive the early stages, most entrepreneurs have to finance their own way, by cutting corners and putting all their earnings back into the business--a process known as bootstrapping.
"Only a small number of companies have venture capital or angel funding," contends Sandy Weinberg, professor of entrepreneurship at Muhlenberg College in Allentown, Pennsylvania. "Obviously, it's a lot harder starting a company when you don't have a lot of money."
Bob Weinstein is the author of 10 books and is a frequent contributor to national magazines.
Best Foot Forward
Greg Easley and Paul Frischer can vouch for that. Both men learned how to build successful companies by the seat of their pants. Their experiences taught them business lessons they know they wouldn't have learned in business school.
"Bootstrapping makes you streetwise fast," says Easley, 28. When Easley and his partner, Kelly Moulton, 27, came up with the idea of launching New York City-based Bottle Rocket Inc. in 1996, they envisioned smooth sailing because they were cornering a unique niche. Unlike conventional Web site development companies, Bottle Rocket creates online entertainment products for professional sports teams and major sports leagues to use as marketing vehicles. "Our business model is simple," says Easley. "Our clients, the National Hockey League or National Football League, for example, pay us for the [trivia games we create], and we get an interest in the sponsorship. For this reason, we felt investors would be interested in us."
Easier said than done. Neither Easley nor Moulton had enough money to develop the sophisticated online games that would attract investment dollars. The only way to get the company off the ground was to carefully budget and bootstrap so investors would eventually deem it a hot prospect.
Easley and Moulton became masters of getting things done cheaply. They set up a temporary office in Easley's tiny, two-room apartment. For nearly eight months, the two partners plowed everything back into the company and built credibility in the marketplace so investors would be enticed by their prototype games. "We lived frugally," says Easley. "We did everything we could to cut corners. The idea was to funnel everything we earned back into the business."
But while cutting corners on food, telephone and electricity bills, and walking instead of taking cabs helped, Easley says he and Moulton were often frugal in the wrong places. "Instead of hiring an attorney to handle legal issues, we figured we could do it ourselves but eventually wound up spending more," he explains.
Fortunately, the partners learned from their mistakes. "Bootstrapping is scary," says Easley, "but in retrospect, it's worth it. During those early months, we learned how to manage [a company] and work with clients. It was kind of like a test run, allowing us to iron out our kinks and learn how to use the resources we had. If we hoped to raise investment capital, we had to prove we were a viable business. A valuable lesson for any entrepreneur is learning how to function on a shoestring [budget]. That's what bootstrapping teaches you."
Easley insists danger awaits companies that start out with too much too soon. "If we had gone out and raised a million dollars, about 40 percent of that would have gone to covering our mistakes," he says.
Easley and Moulton's experience paid off. By reworking their business plan, they raised $500,000 in seed money after being in business for 11 months. Within a year after that, they had raised an additional $1 million to fund their research and development. If all goes well, the partners expect sales of $1.2 million this year and $4.4 million next year.
On A Shoestring
New to the business start-up game, Paul Frischer and partner Doug Gold's bootstrapping experience was more dramatic. In 1993, the childhood buddies launched Chicago-based Music Recyclery.
At the time, Frischer and Gold, both now 30, figured they'd combine their love of music with the hot demand for specialty coffee drinks and open Discover CafÃ©, which would sell coffee, pastries and used CDs. When the partners put together a business plan outlining what they'd need to get the cafe off the ground, their education in the art of bootstrapping began.
After projecting equipment and inventory costs, which included everything from industrial coffee makers, refrigerators and stoves to coffee and desserts, they came up with $120,000. With combined savings of $8,000 between them, the partners figured they "only" had to raise $112,000. After several months of pounding the pavement and asking friends and family for money, they raised $80,000, which was just enough to open their music cafe in November 1991.
Unfortunately, the cafe barely turned a profit. After three months in business, Frischer and Gold came to a telling conclusion: Selling used CDs was more profitable than selling coffee and pastries. So they headed the business in a new direction.
The partners decided to test-sell used CDs at outdoor festivals and street fairs--and they hit the jackpot: They sold so many CDs, they were able to open their first Music Recyclery, a store devoted to selling used CDs, albums and eight-track tapes, in October 1993. Today, they run six Music Recyclery locations, and have sold Discover CafÃ©. This year, Frischer and Gold project sales of $2 million, a slight increase over last year's $1.7 million in revenue.
It sounds like an entrepreneurial fantasy, yet getting to this point required disciplined bootstrapping. For Frischer and Gold, diligent money management was a constant, if not exhausting, process for the two years they were in the red. "Bootstrapping is all about creativity, persistence, hard work and clear thinking," Frischer says. "Once we realized we weren't making enough [at the cafe] to clear a profit, we battened down the hatches and learned to be truly adaptive. We worked 14- and 16-hour days and often slept in the cafe. We were constantly reassessing everything we did. When something didn't work, we tried something new. We were obsessive about boosting our cash flow."
The partners constantly looked for ways to pare expenses. "In our second year, we asked our landlord if we could [postpone paying] him the rent for the summer," Frischer adds. "He went along with it, and as soon as we had the cash a few months later, we paid him."
The partners also negotiated extended terms for practically everything they bought, including utilities. Says Frischer, "There's great truth in the saying `Ask and you shall receive.' "
It sounds frightening, but bootstrappers report they not only learned precious lessons from cutting corners but also had fun in the process. Surviving can be a pretty exciting game. It certainly was for the Franz brothers.
In 1988, Bob Franz, a former salesperson for Hughes Missile Systems, launched Tucson, Arizona-based Executive Office Systems. With minimal capital and only one technician, Franz set up the fax and copy machine dealership in his home.
Although he didn't realize what the word meant at the time, Franz was a natural bootstrapper. His kitchen table served as his desk, his garage was his warehouse, and a decrepit pickup truck delivered the merchandise. Ten months after starting his business, he rented an office in a rundown part of the city, about 30 miles from the city's business center.
In 1991, Franz's brother, Ron, joined the company as an equal partner, and they changed the name of the company to Copier Brothers. Even though the business was profitable, Ron says the two men continued to bootstrap. "We were almost frugal to a fault," he says.
Ron adds that bootstrapping has become a way of life for the two brothers. "I guess we developed a budget mentality, and it never went away," he says. "Even today, we spend very carefully. While many of our successful competitors drive luxury cars, my brother and I drive pickups."
Running a tight ship during those early years certainly paid off. This year, the Franz brothers project sales of $11 million, a substantial increase over last year's $8 million.
As these entrepreneurs proved, pulling yourself up by your bootstraps makes good sense when other cash avenues are closed. It may even teach you lessons that will keep your company profitable well into the future.
Give It The Boot
Steps in the right direction.
Sandy Weinberg, professor of entrepreneurship at Muhlenberg College in Allentown, Pennsylvania, offers the following advice for bootstrapping a business:
1. Realize that some businesses are easier to bootstrap than others. Service businesses, especially homebased ones, are easier to run leanly than manufacturing businesses, which require equipment and machinery.
2. If possible, run your business part time in the beginning. It's less risky if you can get your business going in the evenings and on weekends. "Many Internet and retail businesses have started part time," says Weinberg. "However, it may be impossible to start a retail business part time because you have to be open at key times to attract consumer traffic."
Running your business part time could also pose ethical dilemmas with your current employer. A programmer employed by a software manufacturer, for example, may not be able to start a part-time systems integration company because those services compete with those of his or her employer. Consider the legal implications of starting part time, advises Weinberg. To avoid potential problems, consult an attorney.
3. Keep overhead low. Work out of your home as long as possible. "Conserve the capital you have," says Weinberg. Don't be in a rush to rent an office.
4. Negotiate time rather than price. Rather than expending effort negotiating reduced prices from vendors and suppliers, try to get payment extensions. "Instead of paying bills in the traditional 30 days, ask for 45-, 60- or even 90-day terms," says Weinberg. "It's an opportunity to stall payments so you can build cash flow and working capital.
5. Maximize your resources. You don't necessarily need top-of-the-line equipment and cutting-edge technology. Take advantage of that 10-year-old truck and five-year-old PC until they no longer serve a useful purpose. Only replace equipment and technology when it's absolutely essential. Even then, buy used rather than new equipment.
6. Stay focused. Bootstrapping isn't easy. It requires discipline, diligence and hard work. It's unreasonable to expect everything to fall effortlessly into place. Be prepared for bumps in the road. No matter how tough things get, stay focused on the mission at hand: successfully starting your business.
Don't empty your wallet without assessing your finances.
Most entrepreneurs foolishly put their own money into their businesses without taking stock of their personal financial situation, says Eric Tyson, author of Small Business For Dummies (IDG Books Worldwide).
"Before you pour all available cash into your business, do some number-crunching," he advises. "Determine what you need [to start the business], and then see if your personal resources, typically savings and equity, can cover it after your living expenses are met. The idea is to determine how much of your personal assets you can comfortably put into your business while still keeping some in reserve."
Tyson believes selling your life insurance policy or dipping into pension and retirement accounts to foot your business bills is a mistake. "Dipping into pension money could come back to haunt you if things don't work out as planned and you fold your business," he says.
Finally, if at all possible, don't finance your business with personal credit cards. Says Tyson. "Not only do you face high interest rates, but you also face [the danger of] a poor credit rating and even personal bankruptcy if you can't pay off the debt."
Tyson advises against believing everything you hear about using credit cards for your business expenses. "Entrepreneurs who have successfully launched companies using credit cards have been romanticized in the business press, but unfortunately, you seldom hear about the failures and the accompanying repercussions of not being able to pay off the debt," he says.
This is reason enough to spend within your means during your first and most critical year in business.
Bottle Rocket Inc., (212) 352-2040, http://www.bottlerocket.com
Copier Brothers, 1407 E. Thomas Rd., Phoenix, AZ 85014, fax: (602) 241-0912
Music Recyclery, (847) 855-7844, http://www.useddiscs.com/cdstore