MONEY

Then and Now

This article looks at how individual bootstrappers have changed business practices as their companies have grown.
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Sure, these CEOs still substitute imagination, know-how, and effort for capital. Sometimes

Once a bootstrapper, always a bootstrapper? Not quite. If you're going to move beyond the start-up phase, there are habits that have to be undone and skills that have to be honed to jibe with your company's growth and maturity. It doesn't happen in a single day, but gradually you may find that your business no longer benefits from certain policies and procedures you insisted upon when it was a struggling start-up. For example . . .

* * *

Then: If you didn't have it, you didn't spend it.
Now: You borrow. It's OK to owe.
There comes a stage in the growth cycle of almost any business when the need arises for an infusion of outside capital. And that need, once recognized, changes everything -- how you present your company, how you present yourself, how you spend your time, even how you define the concept of ownership. Tough transitions, some of them, but they're unavoidable. If you want to grow, you may have to owe. Or even let go.

Karen Behnke financed PacificCare Wellness Co., now a $6-million health-services company, with credit cards -- a very grand total of 17 credit cards -- and proceeds from the sale of personal belongings (her skis, her car). Sound familiar?

Back then, Behnke says, first thing each morning she'd read her cash and receivables report. She guesses she spent about 25% of her time managing cash flow, just making sure she had money enough to pay the bills. Then three years ago she sold her company to a multibillion-dollar health-maintenance organization and stayed on as president. Now that her company has access to deep pockets and survival is less problematic, she's free to devote more of her time to issues of marketplace presence and long-term goal setting: marketing (25%), strategic planning (50%), and financial planning (25%).

Taking on new roles can be disconcerting. Richard Rose of Sharon's Finest, maker of TofuRella ("tastes, melts, and stretches just like regular cheese"), would rather he didn't have to spend quite as much time explaining himself and his business to bankers. Rose calls himself a "counterculture businessperson" and "the longest-haired M.B.A. in Santa Rosa"; last summer he toured as guest guitarist for a band called the Pink Flamingos. He says it's a bit weird getting used to the idea that because the local bank gave him a $160,000 line of credit, "it's no longer just me doing what I feel like." Still, he's been able to maintain control of his persona and his style.

"I cut my hair off and wore suits and stuff for a couple of years," he says. "I thought I needed to do that to make it in the business world. And it didn't work. So I went back to plan B, and that was to be myself. And it's working fine."

* * *

Then: Pinching pennies was a religion.
Now: You sin sometimes, but that's a good thing.
Every day Fred DeLuca, owner and CEO of Subway, a chain of 9,109 franchise sandwich shops, buys lunch for the employees at headquarters -- all 400 of them. Once a month he invites them to the movies, along with their family and friends. He figures all that probably costs him, oh, about $300,000 a year. But he's just guessing, and he's not too worried about it.

DeLuca does those things partly because he's a nice guy, but mainly for reasons even his chief financial officer would accept. A free lunch on the premises, he reasons, keeps the staff from straying in the middle of the workday. It saves time and encourages shoptalk. Of course, it makes people happy, too. And happy workers, DeLuca believes, are productive workers.

Sacrifice and self-denial, especially in the beginning, are part of the game. Later on, when the company is up and running, you may remember all too well the days when, perhaps like DeLuca, you diverted $14 a week, no more, from cash flow for personal needs. How could you forget? It was hard, sure, but heroic. Every dollar reinvested, every penny redeployed. And yet, as DeLuca has come to appreciate, "it's virtually impossible to keep doing things that way." You change because you must.

Likewise, there comes a time in every growing company's life when it's no longer appropriate to do business in, say, a two-bedroom apartment. Jim Noble of Noble Oil Services did that for years, and managed just fine -- until he began going after the kind of clients whose comfort levels plummet when you take their coats and offer them seats at the kitchen table.

"You have to give those things up because your role and your company's position have changed," says Noble, who four years ago finally left the apartment for a real office. "What started out as being wise hurts you later on. Nice offices, nice furniture, dress codes -- those are things you have to grow into to make it all work."

* * *

Then: A customer was a customer. A job was a job. Who were you to say no?
Now: You can afford to be more choosy, and it pays.
The business of All Americas Inc., in Vancouver, Wash., is brokering freight. Truckers call, looking for loads. Shippers call, looking for trucks. Agents scare up business in the field.

Time was, Linda Wilsdon, president of All Americas, would almost never say no. When a customer called, any customer, she was ready. "Get the freight," she says, outlining her survival strategy in those days. "Get it on the truck, get it moved, get it to where it's money to us. And worry about everything else later."

Now that Wilsdon's company's sales have grown to $4.4 million, she's much more skeptical when it comes to strangers. "Wait a minute," she's more likely to tell her sales staff. "Let's look at this customer. How does he pay? Is he slower than everyone else in the industry? How long are we going to wait for our money? What will it cost us to wait?"

Jim Noble of Noble Oil Services wishes now he'd asked more questions in the winter of 1989, when he was invited to bid on a big job in upstate New York. "Of course, when you're a small company, you don't want to tell people, 'We can't go that far," says Noble, from his office in Sanford, N.C. "We jumped on a plane."

It turned out to be the job from hell frozen over: removing asphalt from oil tanks, in January, in Buffalo. Southern boys, Noble and his crew knew nothing about hard-hat liners or arctic work gear, but they learned quickly.

The general contractor, Hazardous Waste Management, offered progressive billing. But Noble, eager to please, refused. "I said, 'What do you mean? When we're done and we've performed, we'll send you a bill. What else have you got that we can do?"

Noble had bid $196,000 on the job. Expenses to date totaled $140,000 when suddenly, Hazardous Waste Management filed Chapter 11. The bonding company refused to make good, Mobil Oil (owner of the asphalt-encrusted tanks) shrugged its corporate shoulders, and Noble was screwed. He started borrowing money from banks back home, $50,000 here, $75,000 there.

"I had maybe two loans on the same receivables at two different banks," says Noble, "and both banks had liens. I guess to some degree I really did some unethical things. I say I guess I did something wrong -- ha! I know I did. I was really juggling."

What Noble learned: "Give me money before I get rolling. I need a down payment, and we want money to mobilize. There's no need to be shy."

And, yes, some jobs just ain't worth it.

* * *

Then: What, me plan? When's the next payroll?
Now: You take the long view, and you mark your course.
When it comes to capital outlays, Douglas Otto, founder of Deckers, a $57-million outdoor-footwear manufacturer, is uncompromising. He demands a one-year return on investment. Unlike most owners who depreciate assets and figure that money saved over many years is worth the investment, Otto demands an instant payoff. "We concentrate on stuff that saves us money within a year. Things can become obsolete pretty quick, and everything has to pay for itself."

Well, sure, if you make a consumer product, fast and flexible is it. But that doesn't mean you can't strategize. Sooner or later, you have to. It may mean investing in capital equipment that seems beyond your means. Rinaldo Brutoco, who runs the catalog company Red Rose Collection with his wife, Shanna, says he's come to recognize the value in such expenditures. "You get a computer system that works and you don't have to make do with something that's fundamentally broken," he explains. "We spent $100,000 last summer to upgrade our network. The difference it makes in people's peace of mind is enormous. These types of purchases have to be made."

Or it may mean learning how to think in blocks of time longer than six months. Tom's of Maine CEO Tom Chappell, for instance, pulled together a board of directors in 1981, 11 years into the building of his family's personal-care-products company. Chappell looked for people who were strong in areas where he felt weak -- general management, marketing, financing, organization, psychology -- and asked them to help develop a 5-year strategic plan for the company. Their task: figure out how to expand distribution from health-food stores to the mass market. "I was at a point where I knew I needed more ideas than I could generate," says Chappell.

* * *

Then: You thrived on fear, chaos, and the great unknown.
Now: You plan ahead, you stick to the schedule, you eat dinner with your family. Surprise! You function better that way.
OK, so not everybody gets from then to now on this one -- or wants to. Tom Chappell insists that while he's learned to temper his type-A personality, ultimately, "I don't value being comfortable. I think that's stupid."

Moreover, at Subway, Fred DeLuca attacks creeping complacency by sending all his territory leaders multiple voice-mail missives -- as many as 10 a day -- filled with scary intelligence on competitors and other motivational stuff. The voice-mail system with toll-free access costs about $150,000 annually. The 3,500 informal training videos DeLuca sends out as conditions warrant run about $12,000 for each mailing. It's all money well spent, he maintains, because "there are advantages to being on edge."

Jim Noble, on the other hand, after 10 years in business has reached the stage at which he doesn't always have to run quite as hard as he used to, and he's grateful for that. Plus he's convinced he accomplishes more in 60 focused hours these days than he did in 90 frenzied hours back when he was still in bootstrapping mode.

But even Noble finds that too much calm in the workplace -- too little pressure, not enough stress -- makes him nervous. That's what he discovered when he gave up day-to-day control of the division that handles spills and other cleanup jobs and the new guy changed the culture.

"He has allotted for a little bit of the chaos," Noble concedes. "But he's got work scheduled out several weeks. I used to schedule out only two or three days. Everything was a juggle, and I enjoyed trying to make it work. You had only so many pieces of equipment, and everyone had deadlines to meet. I've always thought of myself as a whore. It's like the television commercial -- I say, 'Yes, I can!' and I get off the phone and say, 'How the hell am I going to do that?' And my job is to get it done, not to tell the client, 'No, we can't accommodate you.'

"Now my manager says no sometimes, and it's tough for me to hear that. I guess I had created that culture. I enjoyed it, and we made money with it. Maybe in my mind, I still think that's what it takes to make that area of our business go. I try to stay away from there. I think it actually runs better when I don't mess with it."

* * *

Then: Size was an issue. You had to fool the world into thinking you were bigger, badder, and more established than you really were.
Now: Size is still an issue. Only now the game is making sure your customers know you're still small enough to care.
"We faked it to some extent," concedes natural-foods purveyor Richard Rose. "When you deal with big supermarket buyers, you need fancy business cards, four-color pictures. It's presentation and confidence."

It's a classic start-up scam: coming off as something you're not. You learn little tricks -- referring to yourself as vice-president of your one-person show, playing a cassette of a low din of voices in the background when you take calls, making liberal use of the first-person plural. You have to smooth over slips of the tongue: "Did I say we're two years old? I mean, uh, one. Practically one."

For Snapple Beverage, it meant taking a crapshoot and putting all the company's advertising money into celebrity endorsements. For a while, in the mid-to-late 1980s, all the company's ad dollars went to Howard Stern, who yapped about the product on his radio show. Later Snapple spent half its ad budget on tennis star Ivan Lendl. Snapple CEO Leonard Marsh says it was worth it. "When we went out to sell to distributors, they'd go through all our stuff and see Ivan Lendl's picture, and right away they thought, 'Oh! These guys are big! He must cost a lot of money.' And he did! But we wanted to show people we were very serious about growing."

Now that the company's sales have grown to more than a half billion dollars, Snapple has another kind of problem: how to maintain its "We're just folks, we're not PepsiCo" persona. So it has added Rush Limbaugh to the parade of media pitchmen, in addition to featuring national TV spots with neighborly, down-home customers. The message: we're established but local, solid but quirky, big-league but still fresh, a phenom -- the $516-million public company that doesn't feel corporate. Not easy.

* * *

Then: You gave them start-up experience and maybe some equity. What more could employees want?
Now: Bucks. You want talent, you pay for it.
When Mark Cohn launched Damark, a consumer-products catalog retailer that moved $364 million worth of stuff last year, he couldn't offer much in the way of cold, hard cash to prospective employees. "Back then," Cohn recalls, "we were selling people on being on a rocket ship to the moon." A ticket was often enticement enough.

Eight years later Damark can't sell that buzz anymore. "Now the compensation system is different, absolutely," Cohn says, "because we're trying to attract different kinds of people. Clearly, today we're compensating in a much more thoughtful and much more professional way." Besides, Damark doesn't look poor anymore, so it can't pay lean, mean wages. "Today you pull up to the building," says Cohn, "and it's hard for people to remember the time when you didn't know if you were going to be able to meet payroll, and you didn't know if the catalog was ever going to work or whether you'd be able to finance the business. We win people to our cause a bit differently now."

Robert and Ellen Wallace, who founded Arizona Sun Products, have learned much the same lesson. "I used to hire people at low rates, but I've had to rethink that," Robert says. "It's the same with everything else. Better phones, faster computer systems. If you want quality, you have to pay for quality."

Partly it's a case of learning the hard way. You start out with cheap and you make do -- until you finally admit that cheap isn't good enough. "At the beginning I couldn't afford to pay a premium for an employee," says Bejan Douraghy, founder of Artisan Professional Freelance Representatives, in Chicago, "and my turnover was high. That's really changed, especially in the last year. Now I pay people what they deserve. I've recruited people from Fortune 500 companies, and I've really gotten a good team together."

But also, as your business grows, it grows more complex. Tasks arise that didn't exist at the beginning, and someone's got to take care of them. "After a while," says Jim Noble, "the company's growing quicker than you can grow, and you say, 'Hey, it's going to be in everyone's best interest if I recruit senior management."

Still, he had trouble paying serious money for senior managers when he was paying himself only $35,000. "It was hard to bring in a $90,000 guy," Noble says. "I didn't have a good understanding of what a guy like that did to make his money."

He does now.

* * *

Then: You were the whole show.
Now: Others have key roles. You're the producer.
"I've gone through two big transitions with staff resources," says Subway's Fred DeLuca. "First I went from having no resources at all, to finally getting the resources and learning how to manage them. Now I'm at the point where I'm managing less. When people know what they have to do, the worst thing I can do is overmanage."

Delegating is a simple concept, granted, but it's among the toughest skills an entrepreneur must learn, and the most important.

"It was hard for me," DeLuca says. "But I learned that as the boss, I could be a really serious obstacle to people's getting their work done. I'd jump up and run over to the next office and say to our marketing guy, 'I just had a great idea!' and I'd give him an assignment. One day he said to me, 'Fred, it's wonderful you have these great ideas, but you've got to give me enough time to get the last great idea done.' And it struck me that I was creating far too much turmoil for people to work."

Part of what helped DeLuca begin to undo bad habits was franchising the operation in 1974. Faced with the need to deal with people who worked for Subway but not for him, he learned a new set of communication skills. "I realized I had to switch from an authoritarian to a persuasive style of management. I had to be able to explain what I wanted so it made sense. And that was a revelation."

* * *

Then: You and your company were one.
Now: You're still friends, but you've given each other room to grow.
Partly it's a money thing. if you're like most people, not only did you start out by putting all your personal assets at risk; long after you were established, you continued to guarantee business loans with personal assets.

And partly it's a matter of the heart. At the beginning, success, failure, embarrassment, accomplishment -- whatever happened to your company happened to you. If the company won, you won. If the company took a pounding, you suffered. Nothing could keep you apart.

That kind of relationship is hard to escape. Some company owners never do. Says Bejan Douraghy, "It's very hard for me to separate the risk I take and the risk the company takes. Even though I know they're separate, I still feel that I'm totally responsible."

For Tom Chappell, it has been a fitful process, marked over the years by a slow-growing acceptance that at least a few other people in this world may care about Tom's of Maine almost as much as he does. Those people have helped give Tom's a life apart from Tom. "You have to go through some struggle to know how committed people are," he says. "Before, I would have regarded it as a weakness not to have all the answers and be the leader. I don't feel that way now."

Mark Cohn's epiphany occurred on an airplane in 1989, three years after he'd founded Damark with David Russ. On that day, a slow, subtle shift achieved critical mass. Not that Cohn wasn't needed anymore; he just wasn't needed every hour of every day. He realized that yes, within limits, things would take care of themselves back at the office. It was still his company, but it had a life of its own.

"I used to run to the phone the moment I got off the plane," says Cohn. "And I didn't that day. It was a wonderful feeling."

* * *

Research assistance provided by Karen E. Carney.

Last updated: Sep 1, 1994




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