The Secrets of Bootstrapping
Everybody complains that capital is drying up, but most businesses are started on a shoestring anyway. These 13 companies demonstrate how* * *
Long ago some aboriginal entrepreneur launched the world's first profit-making concern. There was no cash in those unenlightened times. Therefore, he or she did for business what the Big Bang did for the universe: got it going from nothing. Since then any number of corporations have lifted themselves by their bootstraps out of the same primordial ooze. The once-impoverished founders of Kelly Services, Hallmark Cards, Oscar Mayer Foods, and many other enduring household names tell stimulating start-from-scratch stories. [See quiz, "Guess Who?" below.]
Inc. magazine has been rubbing elbows with ingenious self-starters from its very beginning, too. Our premier issue (April 1979) carried an article about a garage-born computer company tentatively nursed to life by a couple of guys in their twenties who whimsically named it Apple. Then again, in our corridors severely undercapitalized but now successful founders have been rubbing elbows with another bootstrapper: Inc. descends from no-money-down origins, its 24-year-old corporate roots traceable to a humble pamphlet on sailing.
Nowadays, it seems, a new business is apt to be a Compaq or MIPS kind of thing, hitting the ground fully capitalized, fully researched and developed, fully located, fully staffed, and fully positioned to rake in a few hundred million dollars within the first three years. A tendency away from garages and into vestibules became evident a decade ago, when, thanks to the generous backing of venture capital, Lotus Development Corp. was able to spend $3 million promoting its first product. That formidable sum was assumed to have made it impossible for new software companies to even think of beginning with anything less.
For reasons about to be generally explored, however, it wasn't assumed formidable by one Philippe Kahn. Just off the boat from Europe, Kahn was unschooled in how investment flows in the world's leading economy. He didn't realize it's not supposed to flow to naïfs like him.
And it didn't. Barely a year later the penniless Kahn decided to go it on his own without even a corporate identity. (In a winning bootstrapping move, the one he eventually concocted was designed "to sound like an important company.") Kahn was so simplistic as to believe that despite a total lack of capital and the concomitant inability to borrow any, he nonetheless could take on well-heeled competitors like Lotus and make himself a bundle.
For a start he gathered a troupe of clued-in helpers, set up a battery of fake telephones, and to impress visiting potential vendors, pretended to be a briskly thriving business. You'd dismiss the stunt as totally ridiculous, if it weren't for the fact that, hard on the heels of its well-financed rival, Borland International Inc. is valued at $680 million, a mere eight years later.
What's impressive in terms of the above references is not only that any of us could have pulled off the same feat but that many of us still are. The ranks of shoestringing hopefuls who passed through Inc.'s corridors in the 1980s remain undiminished in the 1990s. And like their famous predecessors, the business breeders profiled in these pages -- a gamut that runs from manufacturers of goods as low-tech as stuffed beavers to services as specialized as psychological testing -- began with pocket change. In some cases not even that, and in no case with more than $999.99. Each undercapitalized start-up chosen is now at least six years old. As the founders attest, the financial system that was accessible to earlier bootstrappers such as confectioner William Wrigley Jr. in 1891, carmaker Henry Ford in 1903, Reader's Digest publishers DeWitt and Lila Wallace in 1922, and high-technologist An Wang in 1951 remains equally accessible today.
The Elements Of Bootstrapping
When you catch onto the rules of bootstrapping, access routes to other people's money abound, though not necessarily for the coin of the realm. The capital of credibility -- other people's willingness to hear you out, to grant credit extensions, and to barter (or merely to lend an empty after-hours desk) -- does a bootstrapper as nicely as cash. To attract such implicit investment, bootstrappers have to exude confidence both in themselves and in their products. "A rush of adrenaline that still hasn't gone away" is how DaMert Co.'s Fred DaMert describes that attribute.
Self-belief -- some call it chutzpah -- inspired ProForma Inc. founder Gregory P. Muzzillo and partner one day simply to "declare ourselves in business." To break the news to the rest of the world, they printed official-looking letterhead. Cost so far: $49.95. For another $25, letters were sent to 100 prospective suppliers, from whom they solicited both understanding and 30 days' credit. Enough said OK to launch the duo into their next stage.
Wearing one's heart on one's fiscal sleeve is also an effective bootstrapping ploy. Marc H. Ostrofsky of Information Publishing Corp. recognized early that "a lot of times when you need something, if you explain to people why -- tell them a critical supplier has to be paid by noon tomorrow, for instance -- they'll cooperate."
Plant Technical Services Inc. founder Amin Bishara asked for -- and got -- $125,000 in loans from prospective employees to fund their own pay for a while after he founded a business to hire them. They were offered two points over then-current money-market rates, which no doubt was enticing but which actually equaled prime -- the rate banks charge their most solid customers.
No bootstrapper can go far with an inferior product. Beaver Valley Inc.'s Kaylee Nilan knew her new business was on the right track when established competitors began ripping open her stuffed animals to reverse-engineer their solid construction.
All bona fide bootstrappers indulge in a little pretense now and again merely to stay alive. Nothing that would send up a chief executive for fraud, mind you, but maybe using a telephone for a while at residential rather than commercial rates. Ditto floor space. Marc Sirkin of Secret Identitee Merchandising ran his business out of an apartment, which cost less than renting industrial-park footage. (It helps if the neighbors are away all day working in said industrial park.) Economically distressed cities like Houston are spawning grounds for cashless businesses, whose hard-up CEOs can dictate surprisingly favor able real-estate terms to even harder-up landlords.
Behind the success of any enterprise lies positive cash flow. And because of the vagaries of living on the edge, that's all the more so in bootstrapping. Practitioners have devised various rules to defend against sudden negative turns: One, deal only with vendors who offer credit terms, but don't tell them that's why. Another, when goods are ready to be delivered, deliver them yourself and collect on the spot. The secret is not to get involved in goods or services that take overly long to execute. This is how bootstrapping cash flow ideally is executed: buy material from a vendor on 45 days' credit, turn it into goods that morning, and send them out COD that afternoon. A dedicated producer could cycle cash 45 times over before the inventory bill came due.
Almost by definition, a bootstrapper must avoid industries that call for lots of equipment. A truck or two, maybe, because vehicles sometimes can be financed through an auto loan from the same bank that refuses a business loan. Often the shading is subtle but significant. The advantage of men's clothes, for instance, is that styles rarely change. What a savings in capital expenditures for Nicholas Graham, founder of Joe Boxer Corp., whose machines have been stamping out the same underpants pattern for five straight years.
More discreetly than their sufficiently capitalized brethren, bootstrappers use the system to beat the system. One such aim is to delay by any legal means a check's getting deposited into the recipient's bank. Certain check-writing strategies gain as many as 10 business days -- a significant boost to cash flow.
For all their garrulousness, bootstrappers tend to be an individualistic, solitary lot. Else why, when faced with the prospect of friends wanting to invest in his enterprise, did Physicians Weight Loss Centers' Charles Sekeres spurn them entirely? Beaver Valley founder Nilan took in $10,000 from an acquaintance, held it unused for a while, then returned it when the donor became impatient. A third, Richard A. Kenney of Kenney Communications Inc., reports at first feeling crushed, then ebullient, when a start-up partner quit and withdrew $2,000 in working capital.
"What I like about all this," sums up Fred DaMert, "is it's attainable. We're not talking space shuttles. I happen to have had a great product, but anyone could have thought of it."
Joe Boxer Corp.
San Francisco. Nature of start-up: manufacturing neckties. Founded: 1983. Estimated 1991 revenues: $22 million. Employees: 46.
"I'd go in and make the sale, then rush back and sew the goods. A day later there they'd be, delivered! Customers got the impression that I had dozens of employees, that phones were ringing off their hooks in New York and Chia go and L.A."
-- Nicholas Graham* * *
As a performing musician, Nicholas Graham had ample opportunity to observe peculiar sartorial trends. For his taste, not peculiar enough. So at age 24 he toured some local fabric stores, buying up patterns he considered "more interesting." On a sheet of plywood set atop his bed, he cut and sewed the swatches into ties. The finished goods were sold to specialty shops, cash-only. "I took in $100 and made $100 off it," he liberally gauges, "because overhead was nonexistent."
The neckties-out-greenbacks-in cycle kept up for two years. One day a buyer at Macy's suggested that if the fabrics Graham was using for neckwear were made into underwear, he would generate more money. There went the necktie business, folded, as it were, into Joe Boxer. "The name popped into my head," he claims, "and took over everything." Including major department stores in the United States and factories in the People's Republic of China, where today the corporation has silk prepared to order.
In his first year as Joe Boxer, Graham took in $600,000, "hired some labor," retired the plywood, and subcontracted the sewing. Soon he signed onto a factoring arrangement by which the company would be paid 80% of an invoice on the day an order was shipped and the bank would own the receivable -- a typical arrangement in clothing and furniture manufacturing. "You get cash quicker, which fosters faster growth," Graham explains of the sometimes-suspect financing mode. It certainly does: six months into Joe Boxer's second year, sales had already topped $1 million.* * *
Cleveland. Nature of start-up: brokering printed business forms. Founded: 1978. Estimated 1991 revenues: $30 million. Employees: 65.
"When I was young and worked for someone else, I always ended up getting fired. I had one dependable job; it was with my father, the manager of a large company. He told me, 'Greg, I'd fire you, too, except you're my son.' " -- Gregory P. Muzzillo* * *
It took a mere six months at a (then) Big Eight firm for Gregory Muzzillo, just out of college at age 23 and trained as an accountant, to decide he "was not keen on a career path that demanded such a drawn-out process to make partner." His roommate wasn't fond of the job he had as a salesman, either. So Muzzillo pointed out, "You're a marketer, and I'm a bean counter -- the perfect combination for starting a business!"
And what handier business than brokering forms, standing between a customer's needs and a printer's ability? "Every business uses forms," Muzzillo reasoned. "You don't have to go far to find millions of dollars' worth of orders." The founders' initial capital, such as it was, went mostly into a telephone-answering machine. With that, relates Muzzillo, "we merely declared ourselves in business." The next step was to design letterhead and use it to apply for credit from printers, typesetters, paper suppliers, and such. "To get started selling the products we wanted to sell, we had to get an open line with about 25 plants," Muzzillo says. "We wrote each one that we'd just graduated from college and were bright fellows. That took gumption, but the vendors seemed impressed with our earnestness."
For Muzzillo, the leap was traumatic. "It was discouraging to go from the beautiful interior of a CPA firm -- and knowing what my billing rate was, even though I wasn't getting it -- to schlepping the street, carrying a sample case eight hours a day, begging for orders." The darkest hours came after he hadn't written an order all day, and the last customer asked, "How many forms companies are out there, anyway? You're the third one to call on us this afternoon alone!" Laments Muzzillo: "People kept asking me was I out of my mind -- walking away from a promising accounting position? At such times I thought maybe I was."
Another difference between an accountant and a forms broker, Muzzillo discovered, was that where the former sends a statement, the bootstrapper sends Ilio. Ilio was born of whole cloth one day, says Muzzillo, when "someone didn't want to pay us and we desperately needed that money. So I put on this tough Italian accent and said, 'Hello, this is Ilio. I'm a friend of Greg Muzzillo, and he's told me you don't pay your bill, and he's asked me to collect. . . . ' " Ilio collected.* * *
Information Publishing Corp.
Houston. Nature of start-up: publishing trade newsletter. Founded: 1985. Estimated 1991 revenues: $4 million. Employees: 30.
"My wife had to keep the books, but she didn't know how. 'Keep them like your checkbook,' I told her. For the first few years we worked and traveled together nonstop. Our plan was to get financially stable in four years, then start a family. The fourth year, we started to kill each other instead."
-- Marc H. Ostrofsky* * *
Through selling real estate in college, Marc Ostrofsky maintains, he "learned how people pay for things." So well, in fact, that in 1983 he was featured in a Newsweek article on campus entrepreneurs. His real-estate career was derailed by a nondescript sidewalk huckster hawking telephone charge cards. "Do you get paid to do this?" Ostrofsky asked. "Yeah -- five dollars for every one I give away." "That," marveled Ostrofsky, "is the best business I ever heard of!" So he plunged into it. Before long he was publishing a newsletter about the deregulated pay-phone business. Seven years and two magazines later, his company was raking in $3.7 million.
But not before he made his peace with his subject matter. "That's what got me into my first trouble -- telephones," recalls Ostrofsky of his shoestring days, when it was vital to evoke the image of a thriving enterprise though only a tentative one existed. "I had a home phone, but I always answered it with the name of my company. That's what you have to do -- play different roles." One day Southwestern Bell was the caller. "They said, 'So this is a business? Sorry, but we have to change your rate from $13 a month to $76.' 'Why?' I demanded -- 'It's the same damn line!' "
The publication's largest source of revenue was advertisers, whom Ostrofsky billed as if they were tenants from his real-estate days -- first and last months down on the space. Essentially, the customers funded the business. "I'd never sold ads before," he explains of the enviable arrangement, "and the market was so new to clients that they'd never advertised before. It seemed OK to both of us."
Initial labor costs were reduced by volunteer help. In the beginning the family would sit around licking stamps. As cash started to flow, Ostrofsky paid his mother for her part-time work. But when the benighted woman asked for a full-time position, Ostrofsky let her go. "At first you're emotional and sentimental; that's the nature of starting a business," her son reflects. "The flip side is, eventually you realize that to run an efficient organization you have to do things unemotionally."* * *
San Leandro, Calif. Nature of start-up: manufacturing novelty item. Founded: 1973. Estimated 1991 revenues: $4.5 million. Employees: 15.
"At this point, it feels like a regular job. Many times before, when it would eat me alive at night, I wished I'd had a regular job." -- Fred DaMert* * *
Driving a truck part-time kept 27-year-old Fred DaMert going, since the GI Bill's $200 or so per month didn't stretch very far, even in state college. By the same frugal token, DaMert stinted on gifts for family and friends, preferring to handcraft his handouts. For the holidays of 1973, lucky recipients were to be given a polymer prism that scattered a spectrum of color in the sun.
But when tinkerer DaMert pulled his first sample from the mold, it hadn't quite cured. The thing wilted into an arc. Eureka! Far from a disaster, with its inadvertently rounded surfaces, it cast wonderful rainbows on the wall. "I knew instantly I was onto something," he recollects.
The humanities major shifted to chemistry and optics, trying to determine how to pop prisms from molds in cheap abundance. In the back of an Oakland warehouse (which he also called home), he came up with a predictable method and brought the results to the nearby Nature Co., now a national retail chain specializing in scientific diversions. Its buyer cautiously committed to two dozen. The delighted DaMert packed up his Volkswagen with more and "went on a great selling adventure through California." A year later he crisscrossed the country by plane, seeking out museum gift shops because "they were easy to find, were friendly, and you never had to worry about their credit." By then, at $16 retail, DaMert's curved prism had become The Nature Co.'s best-selling item.* * *
Softworks Development Corp.
Mequon, Wis. Nature of start-up: publishing computer software. Founded: 1983. Estimated 1991 revenues: $16 million. Employees: 34
"When you sit around your office and realize things aren't right, you feel like you're the only person in the world suffering those things." -- Dan Armbrust* * *
Well-written software can change a 19¢ floppy disk into a $199 floppy disk. Unfortunately for a cash-poor start-up, however, to a loan officer the latter looks identical to the former. "Banks don't understand the concept of intellectual property," Softworks Development cofounder Armbrust concluded in 1983. Therefore, the then-21-year-old college dropout decided to capitalize his ambitions solely on their merits -- plus a few hundred dollars of his own.
Armbrust put the cash into a Commodore computer, two disk drives, and a packet of blank diskettes. In the corner of a bedroom, he transferred the program he had written onto each blank diskette and shrink-wrapped it in a household Seal-a-Meal. To get the first rank of distributors back in 1983, Armbrust "sat on the phone" and made cold call after cold call. Following up on the possibles, he'd bring in his program and plug it into the customer's computer. Impressed by either Armbrust's program or his cheek, some bought 5, some 10; all paid COD. "I'd hop in my car and drive the filled order back down and pick up the money," he recalls. For all the distributor was told, Armbrust was merely the rep for that territory.
One technique for keeping the wolf from the door, Armbrust learned from his part-time job at United Parcel Service, was to buy from out-of-state vendors and have the goods shipped COD via UPS. The cashless and creditless buyer pays by check, which the UPS driver relays to the supplier by ordinary mail. It can take as many as five days for the supplier to get paid; clearing the check through the banking system can take another four. Deftly maneuvered, that positive cash position can be parlayed into inventory turnover or easy interest many times over. "Whenever you can get a few days on a few grand," Armbrust instructs, "seize the opportunity."
Beaver Valley Inc.
Etna, Calif. Nature of start-up: manufacturing stuffed animals. Founded: 1983. Estimated 1991 revenues: $500,000. Employees: 18.
"We didn't take money from the business until we actually had to, until the power was ready to be shut off or something absolute like that. For all the hours I put in in the beginning, I could have been earning more at McDonald's." -- Kaylee Nilan* * *
When Ian got a rabbit, the toy industry got Beaver Valley. His mom promised to sew the best stuffed animal ever there was for Ian's fourth birthday, and if today's retail price is any indication, she did: an individual piece from Kaylee Nilan's line of collectible bears, bunnies, and beavers can cost nearly $2,000. The plush family was begotten when local artisans admired Ian's fanciful creature so much they insisted on bringing it to San Francisco to an arts-and-crafts trade show. A toy distributor saw it and ordered more of the same, contracting to pay in full within 10 days of receipt.
Output was a slender 20 to 30 units a month, but at about $300 each, it was enough to make ends meet. When Nilan had a falling-out with her rep, the fast-pay arrangement was seen to have a near-fatal flaw: "the problem was that at the end of the relationship, we didn't have a customer base, so it was like starting from scratch again."
Joined by her husband, Jeff Trager, who left a job as a wilderness ranger to handle accounts, Nilan learned the hard way about the hazards of selling direct. "A toy-store owner in Petaluma tried to con us into giving credit right off the bat. He could sense we were hard up for new accounts. We said, 'Sorry, the rule is that the first order goes COD.' " On the second order, however, the buyer was given 30 days. The next week the COD check bounced and the buyer disappeared with the goods.
At that point any contribution would have been appreciated. One came in the form of a request from an acquaintance to invest $10,000. The money was gratefully, if temporarily, accepted.
"We sold what we thought was a portion of the business. We didn't have a value," relates Trager, "so we called it 'five shares of stock for some future worth at $2,000 a share.' We weren't even incorporated then. None of us knew how many shares there were supposed to be, all told." The trusting stockholder waited for Beaver Valley to declare a dividend, then gave up and asked for her money back. The company bought the shares at the same $2,000 per, plus annualized interest. "In the early days you don't know what you're doing," Trager admits. "If someone offers you money, you take it."* * *
Team Building Systems Inc.
Houston. Nature of start-up: preemployment testing for honesty. Founded: 1984. Estimated 1991 revenues: $2.8 million. Employees: 17.
"After putting in an 18-hour day, when you go home you don't want to have a conversation, you want to get your head clear so you can get back to work the next day." -- Carl E. King* * *
As director of marketing for an established security company in Houston, Carl King didn't have a worry in the world -- until he got laid off, in June 1984. The abrupt dismissal came as he was in the middle of negotiating for the rights to a psychological-profile test. No problem: King simply continued the negotiations on behalf of himself. Soon four others who had been laid off joined him, each kicking in $200.
If King isn't first to admit that when you start a business on naught you'd better have luck, he ought to be. His good fortune came via a rental agreement for office space. The footage was in a building with only seven tenants, which the lessor obviously wanted to fill and show on the books as occupied. He offered King the first two years free if King would pay for the first and last months' rent and sign up for three years at the full rate. A couple of months after the two-year part was up, the owner closed the building. All told, Team Building Systems paid only three months' rent for a tenancy of 27 months and was clear of three years' high-priced obligations. "Houston," affirms King, "is a great place to start a business."* * *
Secret Identitee Merchandising
Los Angeles. Nature of start-up: creating and marketing promotional items for movies, TV, and the music industry. Founded: 1984. Estimated 1991 revenues: $3.6 million. Employees: 15.
"I had to give credit: No credit, no business. There were so many vendors like me that wanted in that customers made me wait. for three years I negotiated continually: 'We'll send a check Friday.' 'I'll call you next Monday.' 'Send us a letter.' Once I had to drop an account; they insisted on paying at 120 days, but we couldn't hold off our vendors that long." -- Marc Sirkin* * *
From his position as a TV-show production manager, Marc Sirkin observed Hollywood's huge appetite for gimmickry. In 1985, at age 25, Sirkin and an associate set up a promotional-products business to feed clever notions to the Tinseltown beast. They would create ideas -- submarine pens to pitch the movie The Hunt for Red October, foam rocks for the song "Like a Rock," T-shirts for "The Simpsons" -- sell their concepts to promotion-minded customers, and coordinate the manufacture and delivery of the finished goods.
At first they labored out of an apartment bedroom. "Eight people would show up at 7 in the morning," Sirkin says, "and by 8, UPS and Federal Express were already ringing the bell." In an elbow-to-elbow setting like that, hiring is difficult. "Credibility is the crux," Sirkin notes. "A prospective employee would come to this tiny apartment, and I'd have to tell him, 'That corner is where you'll be working. If you use the bathroom, everyone will hear you. Your benefits are that you have a plant next to your desk."
In 1986 two do-or-die selling trips to Manhattan led to the company's biggest order yet -- 25,000 jackets at $22 each to promote Arnold Schwarzenegger's role in Raw Deal. The $550,000 commitment was enough to buy the fabric, move into legitimate commercial space in West Hollywood, and hire 45 garment workers to fill it. No sooner did Sirkin do so, however, than the order was canceled. He reminded the buyer that the buyer's good name was etched in solid show-biz faith on the purchase order. Secret Identitee wound up getting a recommitment for 15,000 pieces. "That," says Sirkin with a sigh, "was the closest we came to losing everything."* * *
LaMarca Group Inc.
New York City. Nature of start-up: buying media advertising space. Founded: 1974. Estimated 1991 revenues: $73 million. Employees: 35.
"Big corporations do not like the idea of putting someone into business. They want to deal with companies that look solid and are going to be around. Working out of the basement of your house doesn't fit their image." -- Jim La Marca* * *
How do you react when you see a way to do something better than your employer is doing it? (1) Drop a note in a suggestion box, or (2) leave and start a business that does it your way.
While a media buyer at an established advertising agency in 1975, Jim La Marca opted for choice two. "I had looked on the buying of advertising media as a craft. At the agency, I wasn't allowed to apply the craft properly," he complains. "I was a stepchild, while creative services got all the attention."
Yet for many consumer-product companies, media was a significant budget item, sometimes as much as 30% of gross sales. Indeed, for one client, Richardson-Vicks, the largest vendor cost in manufacturing and marketing its products was for airtime from CBS. The solution? La Marca persuaded Richardson-Vicks (itself a bootstrapped enterprise, started in 1890, when its founder, Lunsford Richardson, concocted a balm called Vicks Magic Croup and Pneumonia Salve, later renamed Vicks VapoRub) to help him start his own business, by promising to save the company some meaningful money if he did.
The client spun off one of its products, Lavoris mouthwash, for a test. The ad agency already had specified what the campaign was going to cost: $700,000. The difference therefore would be documentable; on his own, La Marca promised, he could bring it in at considerably less, or Richardson-Vicks could give Lavoris back to the agency.
The client said to give it a shot. With that, La Marca went out and bought a set of tools of the trade -- a calculator and a telephone -- brought the campaign in at $500,000, and charged Richardson-Vicks a fee based on the savings. "With comparatively little work," La Marca admits, "I took a negligible investment and parlayed it into a base to start a business."
To expand he needed support staff, computerized controls, a waiting area -- in sum, identity. So La Marca struck a deal with another, more affluent firm: give me a desk and make me look as if I belong, and I'll give you a share of the profits as my business grows. "With that association," he says, "I created instant credibility." He now has his own floor-through in Manhattan.* * *
Alpha Products And Bulldog Movers
Atlanta. Nature of start-up: manufacturing plastic visors; transporting household furniture. Founded: 1982. Estimated 1991 revenues: $20 million. Employees: 250.
"There were a lot of vultures who wanted to take us over when the chips were down. We didn't let them. It was physically and mentally hard fighting back from adversity, but you can't give in." -- Jim Scott* * *
At age 20, sitting in a college classroom in Georgia, Jim Scott leaned over to the guy next to him and whispered, "Rich, do you understand any of this stuff?" His friend said no. "Neither do I. Let's get out of here and do something constructive."
The two chums quit school and decided to construct strapless sun visors. They drove down to Florida to do some market research, on which they spent what little money they had. "T