The Start-up of the 1990s
Everything's changed -- money sources; competitive strategies; how technology gets used and how partners get called on; who the founders are and how they manage, do research, and think about growth. In short, the new new-business model isn't what you're used to
Starting a business has always been a Bungee jump. Call it thrilling, terrifying, addictive perhaps. But never safe. Ideas fail to hold. Markets are missed. Not everyone bounces back. Still, time was when even the least resilient business could count on one safety net. It was called a growing economy. In the mid-1980s expanding markets might have indulged the sins of inexperience and given even a half-baked start-up another try. Not so, today. Hard times have made starting a business an entirely new endeavor with no margin for error. One that demands more precision and more perseverance from a new breed of founders. They are the survivalists of the '90s, launching their ventures in a punishing environment -- amidst capital shortages, crowded markets, and a stubborn recession. Conditions may not improve too soon, with long-term forecasts promising modest economic growth of only 1% or 2% a year. And although the hostile climate is sidelining many (start-up rates are down nationally), founder fever continues to run high among a diverse group of would-be entrepreneurs. More experienced, more deliberate, more sobered by the times, these new converts grow daily in number. Who are they?
Founders Are More Diverse
More Corporate Refugees
Count among the entrepreneurial ranks in the '90s nearly as many women as men, and founders who are likely to be older, better educated, and equipped with more skills and accumulated capital than the generation before them. People like sales manager Julie Logue and her husband, Kitson -- a veterinarian and an M.B.A. -- who cashed in a 401(k), sold the Mercedes, and poured their savings into staking out a small niche selling dietary dog treats from South Bend, Ind. Or Susan Michaels, the popular host of a television talk show in Seattle, who sank several years' savings from her six-figure salary into a retail shop for women. Or Ed Bettinardi, age 55, who left a position as vice-president after 30 years with Manville Corp. to start Innoventions, in Littleton, Colo., with his partner.
More Women. At 33, Susan Michaels could already hear the clock ticking. "There are lots of old farts in television, but how many are female?" she reasoned. "I knew sooner or later, I was not going to have a job in broadcasting." Looking pretty and pert made for a less-than-secure living. Besides, after 13 years, it was getting old. So was moving from market to market. "I was never one of those people who wanted to be their own boss," she recalls. "I just got tired." With a year left on her contract, the Seattle talk-show host resolved to start her own business renting formal wear to women in nearby Bellevue. As a local celebrity and regular at charity balls, she'd have a head start.
There are thousands like her. One of the fastest-growing entrepreneurial factions, women now own almost one out of every three sole proprietorships in the country. They are starting businesses at more than twice the rate men are, reports the Small Business Administration (SBA). On average, like Michaels, these women garner 10 to 12 years of experience before opening their doors. And they do it, in many cases, for almost reactionary reasons: to escape the glass ceiling, gain the flexibility to raise a family, or win access to opportunities closed off to them in a corporate world.
More Minorities. While white men remain the dominant flavor today, look for an already mixed menu of entrepreneurs to become even more varied. The '80s ushered in profound changes in the assortment of people starting businesses. Between 1982 and 1987 (the most recent Bureau of the Census figures available), minorities started businesses at twice the rate white men did. The number of minority-owned companies jumped 64%. Asians nearly doubled the number of companies they own. Hispanics increased their business ownership by 80%. Blacks, too, showed signs of increasing business ownership.
More Corporate Refugees. Early anecdotal evidence suggests that growing numbers of those turning to entrepreneurship are corporate refugees, pushed rather than pulled into their new ventures by joblessness and career immobility. More than half a million jobs have been lost since July 1990, more of them white collar than in any other recession in history. As many as one out of every three jobs lost in the last two years has been eliminated permanently.
As a result, finding a new job, in some industries, is now no less arduous than launching a business. Outplacement firms counseling discharged executives report a dramatic rise in the number who opt to go it alone. A study published by the National Federation for Independent Business in 1990 revealed that one in four entrepreneurs were unemployed before starting a business. There's no telling how many others may have been insecurely employed before striking out on their own. The entrepreneurs of yesteryear may have been driven to start a business, come hell or high water. In the 1990s it's the hell and high water that will be driving many into business.
Take Kitson Logue. When the $200-million pet-food company where he worked went through a second buyout, it may have posed no immediate threat to his marketing job, but it promised to wreak havoc on his personal life. "These buyouts and mergers turn your life upside down. It looked as if every year and a half we'd have to pick up and move to another city. I wanted to get control of my life," he explains. At age 33, he solved the problem by starting Stewart Pet Products with his wife, Julie.
They Are Better Prepared
As Industry Insiders
With Market Research In Hand
Wild-eyed dreamers? Never. On a hunch? Not on your life. Outsiders? No way. These well-trained, well-heeled, and well-prepared late bloomers are no novices. They'll be ready to go solo. Because more will emigrate midcareer from previous professions and larger organizations, they'll come with the skills and assets to construct a business.
As Managers. They may be newcomers to entrepreneurship, but they're likely to be old management hands. "I saw a lot of entrepreneurs who did not have the experience, background, connections, or capital I had," says Ed Bettinardi, the former vice-president of Manville Corp. "And I thought, Why can't I do this?" After 30 years, he had salted away a stash of savings and experience. He had held positions that ranged from corporate planning to systems management. After doing consulting for several small companies -- "watching a lot of them borrow money, then piss it away" -- he found his own rough gem of an idea: a reading device for the visually impaired. "When I looked at the combination of experience and capital I had, it was a natural thing to do." And he had a warehouse of expertise to call on: he knew how to research the market, cost the product, source parts, woo suppliers, handle regulators, and analyze risk. Most important, he knew how to sell. Someone with less savvy might have spent twice as much to launch the company.
As Industry Insiders. Founders in this decade will pack an oversupply of one quality that has long characterized companies that grow and survive: industry experience. In a tougher marketplace with a low tolerance for error, they'll need more of it. And with large corporations continuing to hemorrhage managers, the new converts to entrepreneurship will be coming to their ventures smart. Industry insiders, such as veterinarian Kitson Logue, have a clear advantage. He'd spent a decade in the animal industry, including several years in marketing for the leader in premium pet foods, before launching Stewart Pet Products. The experience gave him the eyes to spot a neglected niche in the biscuit market. When he decided to introduce a dietary product through veterinarians, he knew the market, the channels, and the potential competitors by first name. "I had the credibility of being a vet. I understood the professional markets and how they buy. I knew all the players in the industry. I could list the distributors by name." He knew whom to call to check a potential customer's paying habits. He even knew the consultant a rival had hired to spy on him. "It came with being in the business awhile."
With Market Research in Hand. Whether they've previously worked in an industry or not, the founders of the '90s will complete their homework before entering it. Some, like Susan Michaels, may be inspired to start businesses they knew as dissatisfied customers. It won't be some vision thing that will propel this crowd into business. It will be cold research. "I knew television. I did my hair and asked questions for a living; what did I know?" Michaels confesses. To compensate, she worked on a business plan for 18 months. It ultimately helped her secure a line of credit against personal assets. In the process, she undertook an exhaustive analysis of the market in Seattle for renting formal wear. There were 20,000 weddings, and 600 galas a year, attended by 300 to 1,000 people. She interviewed corporate event planners, studied the cruise market, counted proms, surveyed the distribution, height, and weight of local women. She devised an equation to determine sizes and quantities of dresses to carry. She ran the numbers until she figured out how to turn a profit on the second rental of each dress. "I was not going to go on gut instinct."
Similarly, Ed Bettinardi conducted research with dozens of focus groups before putting his prototype into production. He visited hundreds of visually impaired people and called on their physicians and support groups. "Few people appreciate how much you need to know about a customer," he says.
They'll Seek Alternative Seed Money
Talk to entrepreneurs trying to finance a start-up these days, and you'll almost believe in a conspiracy theory -- in cahoots to choke off capital for fledgling companies are the recession, the banking crisis, the decline of venture capital, and the downturn in real estate, not to mention a daunting capital-gains rate inhibiting the self-made millionaires who bankrolled so many start-ups in the '80s. Even high-flying technology starts, accustomed to a healthy diet of venture capital, are going hungry.
Of course, most start-ups, lacking cash flow or credit history, have never done much more than fantasize about bank loans. But the collapse of the real estate markets (particularly on the coasts) has made dreams of bank financing even more remote. Bad real estate loans have siphoned off the capital that a few bold bankers might have lent to start-ups. Even worse, the downturn has devalued many founders' key cache of personal equity: their homes. A second mortgage -- often the best last resort of a capital-starved founder -- may no longer cover the cash needs of the first few months.
From Savings. Moribund capital markets make it plain: when it comes to seed capital, more founders will be bringing more of their own. Who'll have it? Not many. But once again corporate managers with blue-chip salaries stand a better chance of bankrolling their companies. "I've funded this whole thing myself," reports Bettinardi. "Prudent investing and saving -- that's where I found the equity."
Of course, not everybody will be able to afford to sing that tune. The Logues held a series of going into business sales -- first the car, then the house. After chasing investors for the first five months, they realized, "If we keep this up, we're not going to have a business to finance." They decided to sink their savings into getting a product out the door. "We had $20,000 to $30,000 in Julie's 401(k)," Kitson Logue says. "We just had to bite the penalty on cashing it out." While they eventually secured a bridge loan and a line of credit through a state revolving fund, they nonetheless sold one car, the Mercedes, for $13,000, and sold their house for considerably more. "In the end we put in well over $100,000 of our own money," notes Julie. "I invested every single penny I had."
From Partners. Few founders in the spartan '90s will be able to afford going it alone. So more will resort to partners as the best, perhaps only, source of equity. The price of taking on partners can be high: less equity (as a percentage), less income, and less control. But for some there's little choice. If they can't romance a banker or an angel, and can't pay for the talent they need, they may be forced to buy it with equity. Someone else's savings and skills may be just the propellant needed to launch the business.
In many cases, it's not just the capital that runs in short supply. It's the skills and man-hours required. "It just cannot be done by one person," contends Bettinardi, whose partner brought sales prowess. Michaels agrees. "You just need more than one person to start it. I can't imagine having worked more hours than I did at the beginning. The business needed two, sometimes three, of me."
Michaels recruited a minority partner who holds 37%. (Her husband holds 12%.) "I wanted someone with no family obligations, $30,000, and the willingness to work her butt into the ground." Her partner -- she interviewed three prospects -- ran the shop for most of year one while Michaels kept her job in television -- "for the visibility," she explains -- and handled sales and marketing.
Look for partnerships, a time-honored tradition in American business (even Sears needed Roebuck), to be on the rise. A partner can add complementary skills and compensate for weaknesses. Growth companies, especially technology start-ups, have long recognized the advantages that partners bring. More than half of them have been founded by teams of two or more, research shows. In the '90s, fast-growing or not, companies will live and die by the expertise of their founders. The more founders, the savvier.
They'll Run Their Companies Differently
Since time began, start-ups have hatched in the cracks and crevices that bigger companies overlook. But niches aren't simply small these days. They're subatomic. Take the Logues' dietary dog biscuits. While 40% of U.S. dogs may be overweight, the market is still petite. Bettinardi knows that his market -- the legally blind -- taps out right now at 2 million, tops. And Michaels's is, well, a specialized specialty shop.
But wee niches don't mean stunted growth. In a highly competitive pet-food industry, dominated as it is by a couple of Saint Bernards, Kitson Logue says a microniche and alternative channels of distribution are what enable him to grow. Nonetheless, to keep good growth and margins, management strategies during the '90s will rely on a variety of techniques barely visible in the '80s.
Outsourcing. When large companies took to outsourcing, it helped fuel growth in the '80s. Farming out work once done in-house created opportunities for new players. While that practice is expected to continue, start-ups won't simply be beneficiaries of outsourcing. They'll be skilled practitioners. Outsourcing is becoming the strategy of choice for more and more companies.
Even if capital weren't the issue (and it is), the tiny niches these start-ups inhabit allow no room for capital-devouring equipment or capacity. There are no economies of scale to small production runs and micromarkets, so start-ups can't afford to sink cash into bricks, sticks, or paychecks. "We want variable costs instead of overhead," says Kitson Logue. "The less fixed cost you have, the more survivable you are." That means keeping a light balance sheet and thriving on a limited diet of capital equipment and employees. Some companies are already outsourcing everything. Rather than tie up cash building a product, they let others -- manufacturers peddling excess capacity -- worry about making it.
The Logues have doubled sales in each of the past three years, closing in on $1 million. They've grown their specialty-pet-food business without a factory, without a warehouse, without a sales force or employees. They shoulder a payroll of one. "We're sellers and marketers; we don't want to have to worry about the rest," says Kitson.
From the Logues' three-room office in South Bend, 10,000-pound shipments of dog biscuits are shuttled around the world with one fax, two phones, and a PC. One vendor ships a premix of the product to the couple's manufacturer, who sends the biscuits on to the packing warehouse, where workers customize orders and send them out to distributors and reps in five countries. A direct-mail house handles samples. A free-lance artist designs the packaging and some advertising. "We are at the hub, directing traffic," says Kitson.
Like Stewart Pet Products, the Logues' vendors are small. Largely local businesses, they "don't know the meaning of minimum order" and consider Stewart a "decent piece of their action." Although the Logues pay a premium for farming out so much, they eliminate inventory-carrying costs and win a furlough for their cash. "We give up some margin and some control," Kitson concedes. Plus, outsourcing the bulk of their operations requires vigilance. They police quality closely, talking to vendors every day. "Our job is to put a stick in their ribs and do to some degree what GM does. You have to write specs telling vendors every step of the process. It's an endless sequence of small details."
Bootstrapping. Life on a low budget may prove a chronic condition, not just a passing phase for start-ups. Welcome to innovation's real frontier in the '90s: cash flow. With start-ups self-financed and lean for life, the point of the game of business will be making sure cash goes out later, and preferably only after a product is successful. More art than science, the practice of bootstrapping will call for a panoply of techniques including long terms from suppliers, advances from customers, presold orders, rampant subcontracting, royalty financing, and equipment that is used or leased or, preferably, both. And don't forget the credit cards. At one point Kitson Logue could barely fit all of his into his wallet and comfortably sit down.
Rather than tie up too much cash in product development, founders such as the Logues will experiment on inexpensive trials and small runs. "You won't make a lot of money on them, but you'll find out if something works." They'll concentrate their resources and their efforts on distribution, making sure that once in the channels, products move off the shelves. "We pay a lot of attention to distributors and sales reps. They have 2,000 products. We want them to talk about ours," says Kitson.
To cut expenses, the Logues produce most of their own marketing and advertising material for the veterinary channels. A photo in one recent brochure illustrates that: "The vet behind the counter is Julie, the customer is a free-lance graphic designer, and the dog is ours. I was off camera waving a french fry at the dog to keep his attention." Naturally, taste testing is done in-house -- by Sharley, the collie.
Kitson claims even his location in South Bend is a bootstrapper's paradise. "You'll find a better-than-average hourly work force. Companies that have left town have left some decently trained people behind." The cost of living is low enough that "on a decent wage you can live like a king." And a 500-square-foot office, located in a state-designated enterprise zone, goes for $500 a month.
Not many will overlook the value of free publicity. Susan Michaels leverages her media savvy to garner lots of PR, which inevitably builds traffic through her shops. "I've had so much publicity, it's incredible." Her store additions are do-it-yourself jobs that cost $4,000 instead of the $20,000 that others might spend.
Though cheap, bootstrapping exacts its price. In opportunity costs, for example. A founder is bound to pass up chances to grow, for lack of financing. "We have to take the easiest and cheapest opportunities we can to get the furthest the fastest," Kitson Logue says. "That means smaller markets where we can get distribution more easily."
Often the costs of bootstrapping are paid personally. "We have had our backs to the wall plenty. Times when we couldn't make a house payment, couldn't make a car payment," says Kitson. "It takes sheer determination and resourcefulness to grow a business this way."
Selling Internationally. More start-ups will find their primary markets far from home. A growing chorus of economists forecasts that the economies of Europe and Japan will grow twice as fast as the United States' this decade. Latin America's will grow even faster. What it means for start-ups is a precocious pursuit of international sales. They're going to have to tap overseas markets sooner.
"If you don't go global immediately," notes Patricia McDougall, associate professor at Georgia Institute of Technology's School of Management, "you don't have an international spirit in your company. When you eventually do go global, you've got a lot of domestic inertia in the company, and it's harder to do it."
But selling internationally requires more capital. Kitson Logue, who began selling abroad in the company's second year, admits to the overseas opportunities, but says, "They're just harder to finance." Currency exchange is inhibiting. And foreign customers want longer payment terms. "It really sucks up the cash," he laments.
Using Technology. There's no dispute: technology has lowered the cost of entering business. Why, $5,000 easily gets a phone, a fax, and a computer today. For the lion's share of start-ups -- services -- that's enough to put them, at least marginally, in business.
No longer simply a basic tool, technology has become a more critical competitive advantage for start-ups today. Computer control enables companies to customize products and compete for new customers in ever tinier niches.
For Susan Michaels, her information system is her link to the hearts, minds, and hemlines of her customers. She tracks everything from inventory to her customers' birth dates on her computer: She knows each one's dress size; height; weight; age; waist measurement; shoe size; and preferred colors, styles, hemlines, necklines, and sleeve lengths. She knows which formal events they attend and when. She can guarantee identical dresses aren't rented for the same event.
Michaels and others like her look to automation not so much to control costs but to grow. The shortage of entry-level workers -- fewer people will come into the labor market in the '90s -- should force more incipient business owners to leverage technology. Smart companies will begin to use computers to think strategically. "You have to realize this is the way the marketplace is going," says former SBA economist Thomas Gray. "If you don't do it, competitors will, and they'll kill you."
Controlling Growth. Fewer start-ups can bank on riding a high-speed rail to $100 million in the '90s. Growth, when it comes, will come grudgingly. Many starting out today have resigned themselves to the dilatory ride. "I'm not looking to grow to a huge industrial complex," says Kitson Logue, who anticipates that growth without investors will plateau. "We may just have to slow the horse down a bit. But it's not going to break my heart."
In a similar spirit, Michaels casts a cold eye on growth, even though her earnings could support it. "We're not trying to blow the doors out," she says. "There's a danger when you achieve some success early on to expand, expand, expand. We're trying not to make too many mistakes. We want to go slowly." She says she will limit growth to four stores.
Is this a failure of courage or vision? Are these fainthearted entrepreneurs? Or do they have their eyes on other goals? Such as profits. And what they want out of the business. After all, when the business is personally financed, they have to be as attentive to the bottom line as to the top. Michaels became profitable within the first six months.
The Logues were profitable every month last year but one. "This year we'll drop 2% to 3% to the bottom line," Kitson notes. "We've got to be at least marginally profitable. Just in case we want to attract a banker. Besides, a loss comes out of our pocket."
Perhaps their measured approach to growth makes these businesses hardier ventures. Companies that grow more slowly are bound to have better control of their cash. Over time it may mean better growth and better profits.* * *
The marketplace today shows a start-up little mercy. Truth is, it's hardly been this difficult since Hoover. The evidence is only too plentiful: An economy lingering in anemia. Seed capital in scarce supply. Banks too troubled to lend. Real estate values tumbling. Corporate profits and expenditures down. Withered confidence and weak spending by consumers. Companies small and large competing for shelter in the bankruptcy courts. It makes the '80s start-up look like a garden party.
So how can it be any fun? The rewards of starting a company have never been less obvious. Why are so many nontraditional entrepreneurs daring it? Maybe because the business is not all there is to their lives.
What founders such as Michaels, Bettinardi, and the Logues seek is not mercurial growth. It's not a trove of equity or an army of dedicated and grateful employees. They don't long to revolutionize their industries or be lionized in the press. What they want, instead, is license. To work as they want, live where they will. To have a life, not just a balance sheet. To some degree, they are starting businesses for the reasons founders always have: Freedom. Control over their lives. Financial comfort for their families. Desire for autonomy and control consistently outranks wealth in surveys attempting to plumb the complex motivations of men and women who start businesses. But what distinguishes this generation of entrepreneurs is a conviction that their companies remain subordinate to (instead of a substitute for) the rest of their lives.
Maybe it's a return to simpler values. Ed Bettinardi wanted to live in the same house in the same Denver neighborhood. He wanted to be able to send his kids to college and someday retire. Susan Michaels wanted to call her own shots after a nomadic broadcasting career. She craved more time with her husband at their country home. Julie and Kitson Logue wanted to raise a family in South Bend, spend their weekends riding horses and rooting for the Irish. Surely, a thriving business could deliver all that.
But not at the start. Their humble ambitions notwithstanding, their infant companies, in every case, demanded the time and energy the founders had pledged to their personal lives. "It's taken more time, more money, more work, more everything," reports Kitson Logue. He and Julie have had to postpone children as a result. Since starting his business, Bettinardi sees less of the family he vowed to support. For Susan Michaels, the summer passed before she picked even one blackberry from the bushes on her land.
Not that you'll hear disappointment in their voices. Just patience. The rewards, if modest and hard won, are nonetheless sweet. "I'm a guy who should be out vaccinating dogs," says Kitson Logue. "Running this business, two days are never the same -- two hours are never the same." Three years into it, older, heavier, suffering from "bad guts," he concedes the returns have failed to come in torrents. "We haven't made a gigantic monster of a business." But he measures his yield in satisfaction, anyway. "You know, if the bugger went belly-up tomorrow, we'd still have a pretty good feeling of having accomplished something."* * *