Bootstrapping Tactics: A Bootstrapper's Primer
Basic advice for the monetarily challenged
As a bootstrapper you face core realities: you need a location, money, phones, and, eventually, employees. You're constrained only by the boundaries of your ingenuity, craftiness, and sense of shame. It takes creativity, but arrogance and outright chicanery play their parts.
For this report, we spoke with dozens of bootstrapping veterans. No two experiences were identical, yet in recounting tales of their early days in business, bootstrappers pointed to similar tools and techniques that helped them weather the ordeal.* * *
On the whole, bootstrappers are an unbankable bunch. They generate money by any means at hand, however odd. Chemical engineer Allen Shatto, for example, financed his consulting firm, A&L Shatto, by selling clover seed and "cut and wrapped" beef from steers he raised on his 10-acre farm, and his wife converted bolts of cloth into Americana crafts. "We made $3,000 -- that put bread on the table through the start-up phase," he says.
Mike Hosford had no farm nor much else. He was 20 in 1989, when he started PCs Plus Computer Center, in Kettering, Ohio, with a $100 advance on his credit card. His partner, Kevin Mullendore, drew $200. They rented an 8-by-10-foot room for $150 a month, borrowed a desk and a phone, and bought a $20 sign, and they were in business. In the five years it took to establish a banking relationship, they recall, "we couldn't do business-to-business work, because we couldn't float terms for the customer. We did retail where there was cash up front. We didn't keep inventory. We started a wholesale business, and we'd sell at low margins, just to get cash."
Collecting accounts receivable promptly is important for any business. For bootstrappers, it's a life-or-death concern. "I was the bank for some of the biggest corporations in America," says Gary Berman of Market Segment Research & Consulting. "One big client who always paid in 60 days was killing me. I called him and said, 'Look, I have a toddler, and we're out of Pampers. Please help me out here.' A week later, still no payment. So I sent this guy a diaper with a note, and he sent me the check overnight."
If Academy Awards were given out for bootstrapping, Ghanshyam Patel would own an Oscar. In eight years he has built a $35-million long-distance-telephone-services company -- ConQuest Telecommunications, in Dublin, Ohio. An electrical engineer who emigrated from India with $5 in his pocket, Patel spent 15 years with Sprint and LCI before launching his venture. "Typically, to start a company like this you need a minimum of $10 million," he says. "I had saved only $4,000, but with my track record, I won the confidence of a private investor who lent me another $25,000."
He persuaded a judge to let him acquire 400 customers in Ohio and Indiana whose long-distance carrier had gone bankrupt. Those 400 generated sales of nearly $400,000 a year, and Patel got the lot for $5,000. Next, he needed billing equipment -- minicomputers and software. Patel approached GTE, which held title to $500,000 worth of such gear from the bankrupt company, and explained that the equipment, too specialized to sell on the open market, would cost $40,000 a year in excise taxes while it gathered dust. GTE confirmed Patel's assessment with its tax lawyers and sold him everything for $4,001 -- the $1 was for the customized billing software. Turning around, Patel converted the equipment and software into $250,000 in cash by selling it to a friend, who leased it back in exchange for depreciation and some ConQuest stock.
Still, Patel needed a telephone switching system, an industry workhorse called the DMS-250, which went for $3 million, new. "Northern Telecom was still owed $500,000 on a switch they'd sold to a Detroit company that also had gone bankrupt," Patel says. "I'd known people there for 15 years who felt I could do the job. So I picked up the switch, refurbished it, and installed it as good as new." Instead of paying the $500,000 price up front, Patel negotiated five-year financing terms, with nothing due the first year.
Completely equipped, Patel found a buy-or-lease space -- no payment due for the first 15 months if he'd sign a five-year lease. He signed. Today ConQuest has 200 employees, 30,000 pay phones, and an international network, and provides operator-assisted and business long-distance services for some 150,000 "hospitality rooms" in hotels.* * *
It's expensive money, but plastic is often the bootstrapper's only option.
Credit cards financed Mike Hosford of PCs Plus Computer Center. At times he had $40,000 outstanding, having maxed out 8 or 10 cards. "My partner and I had cards, and we used my brother's and my girlfriend's. We weren't picky," he says.
Bill Dayton, Phil Cooper, and Larry Lee started Encore Productions in 1988, when they foresaw a boom in audiovisual shows for conventions, stockholder meetings, and the like. All three had production-related jobs at the Tropicana Hotel and Casino in Las Vegas. The missing ingredient was capital. "We were savings-avoidance people," Dayton confesses. Each of them could ante up only $1,000.
"It was during the height of the credit-card frenzy," he says. "We had good jobs, so we were getting all these applications. We filled them all out and mailed them at once, and the three of us got about 100 cards and $500,000 in credit lines. Customers' deposits didn't cover our out-of-pocket expenses, and without the cards we would have faced a cash-flow crisis. We used the credit lines and paid them off quickly to avoid the interest charges, and then we'd use them again." Encore is now a $16-million company, and Dayton laughs at the absurdity of his credit-card collection; he had 35 in his name. "Somebody gave me a photo album for them as a joke," he says.
A bootstrapper needs a place to call home. Indeed, his business often is in his home. Unless a formal setting is indispensable, as it is in retail, starting at home eases cash-flow anxieties when money is more urgently needed for product development, sales, and marketing.
When Allen Shatto started his consulting firm, in 1988, renting office space was out of the question. He worked from his house in Bel Air, Md. When he could no longer shoulder the workload, he hired four engineers and a scientist, who worked from their houses. To give the modest venture a luster of loftiness, Shatto added an "adjunct staff" of 15 freelancers who worked out of their homes.
"My first big purchase was a personal computer," Shatto recalls, "and we tore the doors off a closet to construct a workstation. When I later hired a part-time secretary, she worked in the closet." Only after he won a big federal contract, in 1990, did Shatto move into commercial offices. Finally, he says, "I had to face fixed operating costs." But he furnished his new digs on the cheap. "There was another defense contractor whose lease was six months out of sync with his contract," Shatto says. "I let him share our office space for free, and at the end of six months, I took title to all his furniture. So we furnished the office for free."
One benefit of working from your house is that help -- that is, your family -- is close at hand. When Richard Caudle founded Rock 'n' Learn, in 1986, he had only $500 to launch the educational-audiocassette business. He set up shop in his home in Amarillo, Tex., later moving to Conroe, Tex., and continuing operations in his new home. For the first big shipment to Barnes & Noble, in 1990, trucks jammed Caudle's garage, and he and his family worked frantically, hoping the neighbors wouldn't complain. They didn't, but the company, which is growing like fertilized kudzu, has moved to its own facilities, employs 11 full-timers, and contracts out warehousing and fulfillment.
Mark Ozkan's neighbors weren't so patient. His company, Vektron International, in Grand Prairie, Tex., distributes mail-order computer equipment. It's now a $25-million business, but in 1989, starting with only $3,000, Ozkan staged operations from his house. In 1991 the city objected to the 18-wheelers going through the neighborhood and cited him for a zoning violation.
Gary Berman remembers how it was in 1988, when he started Market Segment Research & Consulting in a tiny room in his rented house. "Every morning, I'd wear a suit, tie, and wing tips," he says. "If I turned left from my bedroom, I was in my little office. I bought a cassette tape, Office Chatter, with sounds of keyboard strokes, muffled conversation, and even pagings. It wasn't to deceive callers. I had to convince myself that I was really in business."
Seven years later Berman's ethnic-research firm, in Coral Gables, Fla., is a $3-million business. But he had no money in 1989, when he hired his first employee and needed office space. "I was looking for deferred rent while I got the company going," says Berman, who called himself "director of begging." ("That's how I dealt with rejection. It was in my job description.")
He tried a building where a tenant had gone bankrupt. The idle space was desirable -- a four-office suite equipped with furniture and phones. "The agent," Berman recalls, "asked about the company and our reputation. I said, 'As a matter of fact, I'm in the current Newsweek.' It was my first and only published mention at the time -- one sentence -- but it impressed him, and he gave me six months rent-free."
The "office challenged" bootstrapper prefers to be discreet. He's loath to have customers visit his humble headquarters. But sometimes a customer visit cannot be avoided. In 1985 Robert Dobrient and Aurora Pucciarello were just starting Max Distribution, their Dallas-based contract logistics company. Strapped for money, they leased a small room in the back of a larger company.
Dobrient had befriended the front-office receptionist, and when his first big prospect, Southwestern Bell, wanted to come by, he asked for her help. The Bell people arrived, and the receptionist escorted them to Dobrient's little area, acting as if Max Distribution had the whole space. "We were bidding on courier service," he says, "and I asked a bunch of my friends to call us between 2 and 3 o'clock, so the phones would ring continually while they were here."
As an image builder with the outside world, the phone is a key asset. Most bootstrappers use the royal we, not I, on the phone, even when they're flying solo.
Others, like Pucciarello of Max Distribution, take liberties. She'd often put callers on hold, wait a few seconds, and "send" them from department to department, changing her voice with each transfer.
When George Heinrichs founded SCC Communications with $200, in 1979, he rented a closet for his answering machine so he'd have a phone number with an upscale dialing exchange in Boulder, Colo. Steve Safigan, who started Universal Tax Systems in 1989 in his Fredericksburg, Va., home, installed a second phone line that he made sure always to answer professionally.
A bootstrapper's loyalty is, first, to cash flow, and the long-distance wars provided some relief for Berman, whose Market Segment Research racked up big bills. "We switched carriers at least 20 times," he says. "We went with whichever one had the best deal at the moment."* * *
There's only so much you can do alone. Maybe a spouse pitches in, or a retired in-law catches the phones. But if you can barely afford yourself, how can you pay a regular employee? Ken Gansmann and Alex Amigoni set up their salespeople as joint ventures. Their company, UniSource Energy, in Chicago, markets specialty petroleum products. It does more than $12 million a year in business now, but start-up capital was zero in 1986, when Gansmann and Amigoni left Exxon and hit the bootstrapping trail. They decided to put salespeople in business for themselves. UniSource establishes base prices by adding overhead to product cost. It then shares profit margins with its salespeople.
Mike Hosford of PCs Plus says, "We told salespeople we couldn't wait more than a couple of months for them to break even or turn a profit for us. We'd hire them at low wages, and if they did well, they'd get bonuses and commissions. They did everything -- made sales, built machines, shipped them, helped with bookkeeping. Some got raises of 20% a year, and most have doubled their starting incomes."
And at FlexCorp, a specialty business-card designer and manufacturer in Charlotte, N.C., founder and "head buckaroo" Baron C. Hanson gets along with part-timers who work in shifts -- using a single set of equipment. Four years old, FlexCorp projects that its 1995 sales will reach $700,000, but Hanson plans to hire few full-time employees. He read The Goal and believes that most full-time people work only five hours a day and goof off the other three.