Power of Poverty
Great Companies Started with $10,000 or Less
Even years later, when a successful founder has cleared all the hurdles and is puffing on a stout Macanudo, he or she probably couldn't describe starting a business with $0--or even $10,000--as easy. At least not as easy as having real money. With 80-hour-a-week doggedness that even the well-heeled venture crowd has to admire, modern-day alchemists squeeze gold from the likes of charge cards, donations from relatives, favors from customers and vendors, double-mortgaged homes, and overlapping day jobs. They perform that remarkable transfiguration in cellars, kitchens, windowless offices, garages, and, on occasion, the backs of vans.
Gathered through interviews with fast-growing companies that have made the Inc. 500 list, the bootstrapping accounts that follow include every part of the country, cover disciplines from weed control to international telephony, and involve businesses with annual sales of as little as $2.8 million to as much as $280 million. The classic bootstrapping entry into commerce is a headfirst leap taken on faith in the system. It's capitalism's version of a high-wire act without a net: one misstep, and you're done for. That the practitioner prospers is confirmation that free enterprise performs as advertised, as do the freest of spirits within it. Who needs sophisticated investors, high-powered M.B.A.'s, or capital-gains-tax reductions when bootstrappers can get the same results from hard work, extraordinary imagination, and an unending supply of free-for-the-taking chutzpah?
WITH A LITTLE HELP FROM DAD
COMPANY: DeAngelo Brothers Inc.
LOCATION: Hazleton, Pa.
FOUNDED: by Neal A. DeAngelo and Paul DeAngelo in 1978
BUSINESS: Provides weed-control services for railroads, utilities, and large industrial sites
START-UP CAPITAL: $2,000
ESTIMATED 1997 REVENUES: $12 million
"My brother, Paul, and I started out mowing lawns part-time while we were in high school. My father lent us $2,000 to buy a pickup truck. For three years, whatever we made we left in the bank.
"Bootstrapping takes a lot of creativity. You have three desks in an office instead of two. You pile stuff up to the ceiling. You end up staying in a building longer than you should. The same thing with personnel: You hire people to do one thing, but if they can also do two other things, you tend to have them do all three instead of hiring additional staff or contracting out. You start with two people. There's obviously a point at which you need to hire the next person--all the way up to the 200th employee we have today. And we're making some of the same kinds of decisions now: when do you commit to a full-time person? If you don't have a fat bank account to draw on, you tend to get creative about how you answer that question. You break up a job and let four people take on an extra 5 or 10 hours a week to get the job done. Or you rely on your accounting firm to pick up bits and pieces of your business until you bring in a controller. It's like that with every position: the first human-resources person, the first safety director. The hardest thing is figuring out whether you should commit those dollars or continue trying to be creative for as long as you can."
NO MONEY FOR MARKETING
LOCATION: Fairfield, Iowa
FOUNDED: by Fred Gratzon in 1989
BUSINESS: Resells domestic and international long-distance services
START-UP CAPITAL: $0
ESTIMATED 1997 REVENUES: $280 million (Inc. estimate)
In 1988, when my wife was pregnant, I got fired from a business I had founded and had to give up a salary that I'd thought would never go away. While I was trying to figure out what to do, I stumbled on a way to discount AT&T long-distance calls. I had been well known in town, and now I was going around to my friends with my hat in my hand, asking them to buy my long-distance program. I was humiliated, but I needed to support my family. I was operating out of a spare bedroom and making only local calls. There was no capital involved. Zero.
"I was going to do this only until I reached a plateau of $2,000 a month. After a month I started to think, 'This is really lonely. I need someone to do this with.' My wife was terrified. She saw a partner as additional overhead and yet another obstacle to achieving our goal, survival. I thought that if I had another brain helping me, we could have fun, be creative, play the business game, and make it into something. A good buddy, Cliff Rees--he's now the president of Telegroup--had a job with a faltering software company. I'd go to his office every day to fax my new orders to AT&T. It was exhilarating every time I got an order, and I'd bound up the stairs to his office. When I explained the business to him, he expressed interest, so we joined forces. Thank God, I attracted a brilliant partner.
"Because we didn't have any money to spend on marketing, we decided to use independent salespeople to represent us. We gave them a commission based on the customer's bill, a percentage that was much more than AT&T, MCI, and Sprint were paying their salespeople. In fact, we still do that today.
"Today we have customers in 180 countries--in more countries than any phone company in the world, including AT&T and British Telecom. We have basically bootstrapped ourselves to this point."
THE APPEAL OF LOOKING HOMEMADE
COMPANY: Calzone & Co.
LOCATION: Redmond, Wash.
FOUNDED: by Mark and Madeline Peters in 1988
BUSINESS: Manufactures frozen food
START-UP CAPITAL: $5,000
ESTIMATED 1997 REVENUES: $2.8 million
My wife and I started with $5,000 in savings, but we never tapped the full $5,000. We just spent it a few hundred dollars at a time as we needed it.
"We found out pretty quickly we couldn't sell our homemade calzones unless they had been prepared in a facility inspected by the U.S. Department of Agriculture. Of that $5,000, I'll bet $500 was spent on letters, phone calls, and messengers to the USDA. We were rolling out the dough by hand. The USDA required that we have a marble rolling pin--wood wouldn't do, because it was porous. We bought one, and Madeline rolled out the first 3,000 calzones by hand. She'd been working about two weeks when the rolling pin fell off the table and broke on the floor. We stopped production for two days, and while I was searching for another marble pin, I found a used bench-type sheeter, which we used to roll out the dough. That was our first capital expenditure--$1,200. It was a technological breakthrough for us. That sheeter carried us through the next six years of production, to where we got to an average of 3,500 units per day. We ran two shifts.
"When you sell a frozen-food product, you're up against beautiful packaging. A Styrofoam tray--much like what they put ground hamburg in--was the only thing we could afford, but the trays kept falling facedown in the frozen-food section. So we had to constantly go back into the stores and stack them up again. When we were finally able to design packaging and try to break into the big markets, we demonstrated our original packaging as part of our presentation. We believe to this day that account executives were so amazed by the homespun product packaged in a plastic tray, that we won Safeway, SuperValu, and other major accounts. The appeal obviously was that the product looked homemade, so we've tried to maintain that appeal.
"We still have that broken rolling pin on a shelf in our office as a memento."
ANOTHER GARAGE START-UP
COMPANY: Open Systems Group Inc.
LOCATION: St. Louis
FOUNDED: by John Marx in 1989
BUSINESS: Provides computer-related professional services
START-UP CAPITAL: $1,000
ESTIMATED 1997 REVENUES: $3.5 million
I got married in September 1986, and I promised my wife that I wouldn't start another company until I had paid back all the debts--$60,000--of a company I had started in 1984 and closed in May 1986. I started Open Systems in my garage in 1989. I took out more than 15 credit cards and paid an interest rate over 20%. That's how I lived--made house payments, bought groceries--not how I capitalized the company.
"I felt I could have raised venture capital for Open Systems, but I had a long talk with my brother-in-law, a lawyer in Wichita. He discouraged me from selling equity in the company early. He felt I wouldn't be able to do the things I wanted, that the venture capitalists would want control. So I decided to bootstrap it and make my own way.
"I started in the garage, literally. Early on, I was on the phone with a vice-president of AT&T in Atlanta, and we were talking through the final terms of an alliance document. In the middle of the conversation, my dog barked. He said, 'Was that your dog?' I said, 'Yes.' 'Are you at home?' I said, 'Yes--I'm at home today.' Shortly after that, I went out and got an executive-suites office.
"Bootstrapping's biggest challenge is having the confidence that you're going to be able to meet the obligations that your family presents to you. I never worried for the business. Meeting customers' objectives is the easy part. What I always worried about was a business failure that would in some way hurt my wife and family."
LONELINESS: THE BIGGEST CHALLENGE
COMPANY: Sales Building Systems
LOCATION: Mentor, Ohio
FOUNDED: by Timothy F. McCarthy in 1988
BUSINESS: Promotes retail and restaurant chains' individual-store sales
START-UP CAPITAL: $0
ESTIMATED 1997 REVENUES: $4 million
Bootstrapping's toughest challenge is overcoming loneliness. The reason I started bootstrapping is simple: I was fired as the head of marketing for a large restaurant chain, and I didn't know any better. I'd had no experience in business. My concept was local store marketing for retail and restaurant chains. I'd take their poor, their tired, their homeless--the bottom-20% dogs that every chain has--and I'd fix them. I was prepared for aspects of business I wasn't used to, like having to sell all the time. And I was prepared for the fear of doing it on my own. But I wasn't prepared for the loneliness, especially in the first year. I hadn't realized how much support you get, in terms of both systems and people, from a regular-size company. But when you're on your own, the value of that support is obvious: having a real person at a nearby desk to bitch with, or having a legal department and a human-resources department. Now that I've succeeded, I help others start businesses, and when I warn them how lonely it is, they get this look of disbelief. 'Just wait until that first time you find you've got no one else to count on, and you'll see,' I tell them.
"At the beginning I believed--naïvely--that I could motivate the manager at the store level to perform certain kinds of marketing, and I would be merely a consultant. In the early years I was more of a training company; I wrote workbooks on how to make things happen. But because I was creating additional work for them, the managers ended up hating me. And it turned out that the number of managers in any chain who actually did the marketing we were teaching them was less than 30%. In '92, Taco Bell asked why I didn't computerize what I was teaching and put in a marketing system that made things easier on the managers. That's what I did.
"Advertising at a restaurant drives traffic through by building relationships--through the use of coupons, special deals, and so on--between nearby employers and that restaurant. I scan a neighborhood for clusters of opportunity to market to. The secret to my staying power as a bootstrapper has been that I work only for the central chains themselves. When chains ask me to go directly to their individual franchisees, I say no. That's how you accumulate bad debt."
Robert A. Mamis is a senior writer at Inc. Resources
The literature on how to build a company from $0 or so is as slender as a bootstrapper's bank account. Recently, however, that body of work has been fattened by the paperback Bootstrapper's Success Secrets: 151 Tactics for Building Your Business on a Shoestring Budget, by Kimberly Stansell (Career Press, 800-227-3371, 1997, $13.99). Her survival pointers include surprisingly sound though hardly exhaustive advice on the basics: finance, setting up an office, marketing, rudimentary management, getting help from others, and coping with growth. Best of all, the handbook provides the names and addresses of hundreds of outside resources--a compilation that alone is worth the price. The author also publishes a quarterly newsletter, Bootstrappin' Entrepreneur. For information, send E-mail to Stansell.
Previous Inc. bootstrapping features appeared in September 1990, September 1991, September 1992, November 1993, September 1994, and August 1995. To find the articles on-line, go to our Web site's search engine and type in the keyword bootstrapper.
So you want to know more about famous companies that have been bootstrapped? For starters, get your hands on Hoover's Handbook of American Business (Hoover's Inc., 800-486-8666, $29.95). Used by our reporter to survey the life stories of hundreds of great American companies, this terrific handbook (his copy is now dog-eared and filled with dozens of bookmarks) is indispensable to the budding corporate historian. Among its best features: an overview of current events within each company and industry; a summary of each business's history from the start-up stage forward; and an index of data, which includes contact information for each business. A pricey $449.95 CD-ROM provides information on major U.S. companies and on big businesses located around the globe, interesting private companies, and emerging corporations. The handbook is also available at bookstores or at your local library.
If you want to contact any of the companies on our hall-of-fame roster, expect a variety of responses. It's interesting to see how diligent some companies are when it comes to keeping track of institutional history. Apple Computer, for example, has a comprehensive corporate biography on-line. And while there are many companies (Coca-Cola, for example) that have great corporate archivists, many others are surprisingly disorganized. Roadway Express, for one, has had to hire an outside firm to keep tabs on its genealogy.
Finally, many big-time entrepreneurs have taken the time to write about their bootstrapping days. While the autobiography of Ernest and Julio Gallo, Our Story, is out of print, Bill Gates's book, The Road Ahead (Penguin USA, 800-253-6476, 1995, $15.95 ), is still available. (Perhaps you've heard of it?) Lillian Vernon's book, An Eye for Winners: How I Built America's Greatest Direct Mail Business (HarperBusiness, 800-242-7737, 1996, $23), is a fun, light read.
CALZONE & CO., Mark and Madeline Peters, 18080 NE 68th St., Bldg. B-140, Redmond, WA 98052; 206-869-5353 40
DEANGELO BROTHERS, Paul and Neal DeAngelo, 100 N. Conahan Dr., Hazleton, PA 18201; 717-459-5800 40
OPEN SYSTEMS GROUP, John Marx, 635 Maryville Centre Dr., St. Louis, MO 63141; 888-755-6736 40
SALES BUILDING SYSTEMS, Timothy F. McCarthy, 9325 Progress Pkwy., Mentor, OH 44060; 216-639-9100 40
TELEGROUP, Fred Gratzon, 2098 Nutmeg Ave., Fairfield, IA 52556; 515-472-5000 40
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