Successful entrepreneurs of every stripe offer readers tips and hints on a wide range of topics.
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.
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Financing
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.
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Credit Cards
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.
Business Location
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.
