Ask an MBA how to start a business, and they'll likely tell you to craft a business plan, pitch it to investors, secure a healthy dose of initial funding and start cranking the PR engine. But the reality is that most entrepreneurs just use homegrown ideas to take their start-ups to the next level — without much help from the venture capital circuit.
Bootstrapping, or the art of building a business with little or no money, is the most common way to start a company. Most are launched with $10,000 or less, according to a Wells Fargo/Gallup study. And some, such as Apple and Dell, became industry juggernauts, dominating their sectors and reaping billions of dollars in revenue — with $1,000 or less to start off with.
The appeal of bootstrapping is simple: freedom.
"When you raise capital, it's not uncommon to end up selling your soul for a pile of money," says Greg Gianforte, CEO of RightNow Technologies and author of the book, Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money. "The biggest benefit of bootstrapping is that, in the end, you own the business and you end up with the fruits of your labor."
To get your start-up off the ground — without investors watching your every move —you'll need to build a culture that inspires creative money-saving tactics, attracts talented employees who will work for less, and controls cash flow to keep the lights on until you achieve profitability. Here's some tips to get you started.
How to Build a Bootstrapping Culture: Make Everyone a Bootstrapper
When hiring an employee, don't just focus on technical skills and experience. Find out if he or she has a bootstrapping temperament, says Peter Cobb, senior vice president of eBags, the Denver-based online retailer of bags, luggage and other accessories.
"It's important that they share the vision," he says. "When you're starting out and can't afford to pay market wages, people will work for you because they want to be part of something special — it's just a fun, high-energy environment."
The goal is to make each employee a bootstrapper, who is willing to sacrifice and accomplish tasks with minimal resources, he adds.
Cobb started eBags with four partners in 1998, when e-commerce was a novel idea. But the five co-founders, most of them veterans of the luggage giant Samsonite, knew people were comfortable ordering bags via catalogue — a good precursor to buying online. And selling suitcases, high-margin goods that leave ample room for marketing and other expenses, seemed like a bulletproof idea at the time.
Then 9/11 happened, virtually grounding air travel for weeks, and the company hit a stump.
"We gathered all our employees and said, 'We can either lay off six people, or we can ask every person here, including senior management, to take a 10 percent pay cut,'" Cobb says. "We didn't lose a single person, it allowed us to save a lot of money and it rallied the team around a plan to make it out of this."
Besides sharing the pain, Cobb recommends offering stock options to each new hire. It has become an indispensable way for bootstrappers with limited means to recruit, retain and motivate employees, he says. Today, eBags has 100 employees, is the largest online retailer in its space, and has sold 11 million bags to customers worldwide.
Dig Deeper: 14 Bootstrapping Tips
How to Build a Bootstrapping Culture: Take the Minimalist Approach
Adopt a no-frills policy, says Gianforte, whose first company was Brightwork Development, a network management firm he launched in 1986 and eventually sold to McAfee Associates for more than $10 million.
In Brightwork's early days, Gianforte avoided renting office space and set up shop on his partner's sun porch in Tinton Falls, New Jersey. The pair would pass the phone back and forth, taking turns being the sales associate, the PR manager, the software engineer and the marketing director.
Even RightNow Technologies, Gianforte's second major venture, grew from a spare bedroom in his Montana home to a public company that will rake in $180 million in revenue this year. "People are going to tell you that you need a marketing department, a branding agency, a nice office space, fancy letterhead and a great website," he says. "You don't need any of that stuff. What you need is a customer who's willing to pay you money."
Dig Deeper: Great Companies Started for $1,000 or Less
How to Build a Bootstrapping Culture: Get Creative with Cheap Marketing Tactics
Forget traditional, cash-consuming ad campaigns and marketing literature. If you hit a sales wall, encourage your staffers to solve the problem creatively — and cheaply.
In 2000, the eBags team — then a little-known start-up in need of new customers — pitched an idea to two large, established companies: the snackmaker Frito-Lay and the yogurt company Dannon. Include a $10 eBags coupon with your products, they said, and your customers will earn $7 on a $3 purchase.
Soon, 80 million bags of chips and 25 million yogurt cups bore the eBags name, and sales jumped 20 percent that year.
"Even more valuable than the sales was the awareness it created," says Cobb. "It was just a creative way to get our name out there. Somebody would see our brand and become familiar with it," which made them feel more comfortable about forking over their credit card digits.
And the cost to eBags? Absolutely nothing, says Cobb.
Dig Deeper: Great Bootstrapping Secrets: 45 Ideas that Can Save Your Business Money
How to Build a Bootstrapping Culture: Use Sales as a Market Research Method
You don't need a finished product to start selling, says Gianforte. At RightNow, he cold-called potential customers and hyped the imminent release of software that was far from ready.
"Forget about putting people in a room and asking them about their feelings," he says. "The best focus group is when I ask a customer for money. They say no, I ask why not, and they tell me why not." The method allows you to determine very quickly, without much cost or effort, if you have a viable business idea.
After making 400 phone calls, Gianforte knew that companies were drowning in e-mails from their customers but were not equipped with software tools to handle the inquiries. (This was 12 years ago, before consumers began turning to the web for customer service.)
"I had zeroed in on what these companies were willing to pay for — all without writing a line of code," he said. "The key is to promise delivery within a certain timeframe."
Dig Deeper: Bootstrapping 101: Switch Business Models On a Dime
How to Build a Bootstrapping Culture: Personal Economics
Determine how much each partner will spend out of pocket to fund the business. The agreement should be fair and equitable, hinging on trust and good faith among all those involved, says Cobb, who used his house as collateral on the eBags office space.
He recommends stretching your personal money as far as it can go, stopping short of bankruptcy. Options include taking out a second mortgage on your home
"I knew that I could get back on the corporate ladder if we failed," says Cobb, an MBA with 15 years of brand management experience. "Keep a close eye on your cash flow and make sure you have something to fall back on."
But mixing personal and business expenses should be a delicate balancing act, adds Gianforte, who cautions against taking on massive amounts of debt. "It's a pretty slippery slope," he says. "It gives you a sense of comfort when there shouldn't be any comfort."
Dig Deeper: When to Stop Bootstrapping It