From the July 2007 issue of Entrepreneur

Rags-to-riches entrepreneurs don't usually brag about crashing on a friend's couch and eating cheap food. But John Vechey, 28, proudly recalls the early penny-pinching days of his Seattle gaming company, PopCap Games, which he co-founded with partners Brian Fiete, 29, and Jason Kapalka, 36, in 2000. After leaving their steady jobs at gaming companies, the trio pooled $100 to purchase business cards, used their own computers and convinced a friend who owned an ISP to give them server space for free. Working first from Fiete's condo, then from Vechey's apartment, they started with a simple business model--to make games and license them to websites.

Then the ad market crashed, rendering their model insufficient and teaching the partners the first lesson of bootstrap entrepreneurs: flexibility. In 2001, based on feedback on their first game, Bejeweled, they created an enhanced, downloadable version. Instead of charging sites like Yahoo! to host their games, they offer the web versions for free in exchange for having the sites direct people to PopCap's site to download full versions of the games. "At first, we were making $5,000 to $10,000 per month. Then it was $30,000 to $100,000," Vechey recalls.

Vechey and his team raked in more than $10 million in 2005, and they now have 13,000 square feet of office space in downtown Seattle, a studio in San Francisco and a satellite office in Dublin, Ireland. They employ 118 people and have more than 30 different games.

Bootstrapping Basics
In doing research for his book, Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money, Greg Gianforte found that less than 1 percent of startups raise money. A bootstrapper himself, Gianforte started RightNow Technologies in Bozeman, Montana, in 1997, went public in 2004 and had 2006 revenue of more than $110 million. He says having an open mind and experimenting are key. "Once you have scale and mass, you do things differently," Gianforte says. "In the early startup phase, you can throw things up against the wall and see what sticks."

That's what Amy James did. After selling her first company in 2000, the former teacher negotiated the right to retain a database of state learning standards that she had spent two years typing into a Microsoft Access file. In 2001, James decided to take advantage of that year's No Child Left Behind Act and put her database to work. "I made a flier saying I could align curriculum with learning standards and faxed it to publishers," she says. "Scholastic called immediately. Then LeapFrog. Then others."

For the cost of office supplies--about $100--James was in business, launching SixThings from her New York City apartment. She made $30,000 her first year, consulting with publishers, reviewing educational programs and curricula, and writing reports analyzing how these measured up to state and federal learning and testing requirements. James ramped up significantly in her second year, hiring two curriculum development employees and one computer programmer. In addition to analysis, the company now sells electronic databases of learning and testing requirements and licenses software that provides compliance reporting along state and federal guidelines.

But James was struggling to pay her rent and knew something had to give. Her mother was a retired teacher back in her hometown near Oklahoma City, and James could tap her mom's friends as workers. So she moved into the same apartment complex as her mother.

"It just made sense," says James, 40. "My mom's friends were starting to retire. My dad was a principal. They were all on state benefits and had a great work ethic." With her mother as her first Oklahoma employee and her father as a sounding board, she began to rebuild her business.

James used open source software and worked from home for the first three years of business, finally moving into a 6,000-square-foot Oklahoma City office space in 2004. She furnished that space, including the refrigerator, she says proudly, for a mere $1,900 by visiting vacated offices and offering cash for the abandoned furniture. She continues to pinch pennies, even after bringing in sales of more than $2.1 million last year. Of her 20 full-time and 43 part-time employees, the vast majority are her parents' retired friends. She has also re-established an office in New York City.

Think Big, Spend Small
Of course, one of the secrets to bootstrapping is choosing a business where you can do the work yourself. Ajay Goel, 29, was living with his parents in 2000 when he created the first version of JangoMail as a side project for a client who needed a web-based e-mail marketing solution. Because he had a computer and no overhead, Goel was able to fine-tune the product, then take it to market.

JangoMail, with its web-based e-mail broadcasting and marketing system that allows companies to create, send and track e-mail campaigns, projects sales of $5 million for 2007. While the four-person company works virtually, Goel invested in 900 square feet of office space in Dayton, Ohio, to give the company a home base and employees a place to work when they come to town.

JangoMail has grown mostly through referrals, networking and search engine advertising, landing clients like the American Cancer Society and Nokia. Instead of expanding through additional products or line extensions, JangoMail remains the company's sole offering, available through its website. Goel is constantly tinkering and adding features. "I wanted to operate with a salesperson-less model," he says. "We are there if [customers] need us, but they can buy the product on their own."

The same model works for Vechey's company, with customers buying games online. While Vechey and his partners still work on attracting advertising partners, they don't have to compensate a sales team.

That type of strategic cost cutting is smart, says Ryan Allis, author of Zero to One Million: How to Build a Company to One Million Dollars in Sales and co-founder of Broadwick, an e-mail marketing company. Founded in 2003, the Durham, North Carolina, company expects sales of $6.3 million in 2007.

Allis says it's also possible to save by bartering for business counsel and services. He advises bootstrappers to think creatively about their business deals. For example, when he needed legal and accounting assistance, he found that, in exchange for a small percentage of equity in his business, the firm might waive its fee or delay payment for a year--instead of eating into his precious cash reserves.

A little help from friends allowed Maureen and Jeff Kendall to launch their San Jose, California, T-shirt company, Little Ruler, with about $1,000 for their first run of 100 T-shirts. Jeff, 39, was a well-known figure in the skateboarding world when the couple had their first son, Cole, in 2001. They received tiny T-shirts individually screened with skateboard industry logos as gifts. Seeing people's reactions to the shirts inspired them to launch their own line of children's clothing featuring logos licensed from hot skateboard companies. As word got out about their idea, friends offered to help design the T-shirts and their website for free, saving the couple big bucks on some basic startup needs.

Gianforte advises entrepreneurs to keep a close eye on cash reserves. In the early months, cash-flow projections are key. Simply create a list of the cash coming in and the cash that needs to go out week by week. "Then scrutinize every single outflow," he says. "Ask: Is there another way? How can I avoid making that expenditure?"

Another strategy is structuring payment so you get your money right away. Gianforte knows of a maker of high-end massage tables who requires a 50 percent deposit to cover his materials and labor. When a large retailer offered to purchase 100 tables but would only pay after delivery, the table-maker said no deal, since he'd have to carry the expense for several months between his initial outlay and final remuneration--not to mention the potential risk that he might not get paid at all.

You've Got Potential

You've Got Potential
While being smart about saving and spending is essential for bootstrappers, generating sales is even more so. "You can go through [money] quickly just trying to get your brand out there," Gianforte says. "Make sure you're spending advertising dollars that will get you immediate sales instead of [just] brand recognition."

James says pounding the pavement for sales should be job one of any startup. "Too many businesses spend before they've figured out how to monetize the product," she says. "I've tried to hire sales consultants--they want to spend thousands to set up a sales force. That's the opposite of what I do. I make a sale, then figure out how I'm going to deliver it."

Gianforte says bootstrappers should devote their limited resources to finding tactics that work and building strategies around them. He compares business to war, saying there are two jobs in war: making bullets and shooting bullets. In business, making bullets means building the product, and shooting bullets means selling it.

It's harder to bootstrap when you have to spend on inventory. The Kendalls, whose company will top $1 million in sales this year, order their runs conservatively and operate from home. Until now, most of their business has come through the website. But the retailers who have been contacting them about carrying their products have made them realize the market potential. They recently opted to work with a showroom, which sells to upscale clothing boutiques like Fred Segal. This, says Maureen, 33, will help them catapult their retail business without taking on the expense of full-time employees. "Until now, it's just been boutiques calling us," she says. "We've been talking to this company for over a year now, and they love the idea. The fact that they're excited about our product is really going to help them sell it." The Kendalls also plan to open up a brick-and-mortar store featuring their clothing lines by the end of 2008.

Cultivating your best customers and serving them well so they become repeat customers and referral sources is also an essential step that leads up to the million-dollar mark. Gianforte says you need to understand why your customers are willing to give you money over your competitors. Be clear about your advantage and work to protect and improve it, he says. That includes finding better ways to qualify your efforts so you're spending limited amounts of time with prospects who don't pan out.

In his experience, Gianforte says customers who request brochures are often not immediate sales prospects. When he founded his company, he deduced that requesting brochures was a polite way of saying, "I don't want to talk to you now." So he ditched the print materials in favor of offering a live demo of his software product. Sure, he lost more of the prospects who called in, but he ended up yielding a higher percentage of sales because the people who were willing to agree to the demo were people who were willing to buy.

While their businesses and strategies are very different, successful bootstrappers have one thing in common: a deep-rooted belief that no matter how big the challenge is, there's always a way to overcome it.

"I know so many people who stop themselves from succeeding in their companies because they don't believe they can do it, or they can't admit they need to do something differently," says Vechey. "They just give up. If you're really committed, you can always find a way."

Gwen Moran is Entrepreneur's "Retail Register," "Quick Pick" and "Sell Buzz" columnist.

Make Your Cash Count
While bootstrappers typically look for ways to save money on everything from office space to consulting services, there are some things that are worth the splurge. When you're getting ready to launch, don't skimp on these.

  • Legal services: Ryan Allis, author of Zero to One Million: How to Build a Company to One Million Dollars in Sales, says it's usually not a good idea to pinch pennies when it comes to legal counsel. The legal advice you get early on, including the form of organization for your business, is critically important and hard to undo. "Make sure that [however much] money you have, you spend it well [on legal counsel]," he says.
  • Good people: Greg Gianforte, author of Bootstrapping Your Business: Start and Grow a Successful Company With Almost No Money, advises you spend money on hiring good people and creating strong partnerships. "If you add one bad apple to [a company of] four people, it can ruin your company," he says. In addition, Gianforte advises spending time and money on your partner prenup, including what happens if one of you wants to walk away.
  • Design: From your letterhead to your website, Allis says that investing in good design services is another smart way to spend some dough. Using a clip-art logo or a clunky website designed by your best friend's cousin can scream amateur. Make sure that from the start your business looks as successful as you want it to be.

Of course, that's not to say you should break the bank on these essential elements. Allis and Gianforte both advise using your contacts and negotiating power to get good deals. But when it comes to the legalities, people and look of your business, be sure to choose quality over price.