Cover StoryIt would be reasonable to think that entrepreneurial bootstrapping is no older than the penniless launch of Apple Computer Inc.--the first company to become famous for starting in a garage. It would be reasonable to think, too, that the handicap of poverty imposes a limit on the prospects of even the best bootstrappers--that really huge businesses, Apple notwithstanding, never get their start that way.
It would be reasonable. But it would be wrong.
A resource-poor launch, it turns out, is at the root of many of this century's most successful and admired companies--more than 20 of which are named in this issue's bootstrapping "hall of fame." Great companies do start this way. In fact, as the examples here show, sometimes companies become great because they started this way. The product-repositioning of the Clorox Co., the niche discovery by Roadway Express, and the operational strategy of the Limited all resulted from bootstrapping's demands. Ingenuity gets substituted for capital. Market feedback gets substituted for guesswork.
In the experiences of these hall-of-famers are lessons for the start-ups that are bootstrapping their way to growth right now.
Brothers Galen and Carroll Roush and their brother-in-law Charles D. Morrison started Roadway in 1930, with each man contributing $800 in start-up capital. Roadway Express began with 10 owner-operated trucks and three terminals, in Akron, Chicago, and Kansas City. At first, all the tiny company could get were less-than-truckload shipments, which ran up their costs per truck. The Roushes tried hard to get full-truckload shipments, and the company grew.
But real success didn't come until the late 1940s, when the founders realized that their bootstrapping-induced early niche was a meal ticket in disguise. Less-than-truckload shipments--LTLs--were moneymakers despite their higher costs, because Roadway could charge higher rates for them. With that discovery, the three founders made LTLs the primary focus of Roadway Express. Now the second-biggest trucking company in the nation, Roadway has revenues exceeding $2.4 billion a year.
In May 1913, five Oakland, Calif., men pooled $100 apiece and started Clorox. The group had virtually no experience in bleach-making chemistry, but it suspected that the brine found in the salt ponds of San Francisco Bay could be converted into bleach using a process of electrolysis that others had developed. Within six months the group raised an additional $3,000 in personal funds in order to build a physical plant for producing a powerful bleach agent for commercial use. A public offering the next year raised $75,000.
One of Clorox's early investors was a grocer named William C. R. Murray, whose wife, Annie, took over the family grocery store when Murray took Clorox's reins as the company's general manager. It was Annie who saved the company. Struggling to make payroll and bring in revenues--from any source he could find--William Murray had plant chemists develop a less concentrated household bleach formula. Annie gave free samples to her customers at the store, and the new product quickly became popular as a laundry aid and disinfectant. Clorox repositioned itself for home use and never looked back.
In 1951, Lillian Vernon, chairwoman and CEO of the eponymous mail-order company, was a recent bride who was four months pregnant. In order to help support her new family, Vernon needed to earn extra money. Unfortunately, society in the 1950s dictated that she should stay put, at home, for the duration of the pregnancy. What kind of job could she do from home? Her brainstorm: selling monogrammed purses and belts, manufactured by her father's leather-goods company, through the mail. She took $2,000 in cash that she and her husband, Sam, had received in wedding-gift money and designed a bag-and-belt set targeted at high school girls. A $495, one-sixth-of-a-page ad placed in the September 1951 issue of Seventeen Magazine elicited $32,000 in orders by the end of the year. Vernon processed the orders--hundreds weekly--at her kitchen table. She realized she'd given birth to a business.
In fiscal year 1997 her company processed 4.6 million orders, employed some 4,000 people, and posted sales of more than $240 million.
The Limited was founded in 1963 by then-26-year-old H. Leslie Wexner. Wexner had worked at his family's retail store, but he left after a disagreement with his father. With a loan of $5,000 from his aunt, he opened one small retail women's clothing store in a strip mall in Columbus, Ohio. Wexner had studied his father's books and discovered the problem that would become his opportunity: formal and business clothing took too much time to sell. His father's cash was unnecessarily tied up in inventory. Casual clothing provided a slimmer margin, but it sold more quickly. Higher margins, Wexner decided, weren't as important as healthy cash flow--especially if your lack of capital meant you couldn't afford much inventory in the first place.
The cash-flow-is-king approach worked. Today the Limited operates more than 5,600 stores in the United States (including Lane Bryant, Abercrombie & Fitch, Express, Victoria's Secret, Structure, Henri Bendel, and Bath & Body Works stores).
The young Ted Waitt was restless. First he quit college to sell PCs; then he quit that job to start a company. That was in 1985. Waitt, using his grandmother's nest egg as collateral, borrowed $10,000 and started TIPC Network in his father's South Dakota barn.
The company, renamed Gateway 2000 three years later, has embraced frugality from the start. Cheap digs, a cut-rate locale (South Dakota is no California when it comes to real estate or labor costs), and a direct-sale-only distribution strategy (Gateway sells its computer equipment and software over the phone) are all central to Waitt's rigorous bootstrapping ethic. What's more, Waitt's best-known marketing gambit might never have been dreamed of if not for Gateway's resource-scarce beginnings. Because a typical computer-industry media campaign would have been far too costly, Gateway invented its now-famous faux-cowhide boxes. Along with small, clever ads in tech magazines, the box design generated huge brand awareness--at a tiny expense. Gateway is projecting 1997 revenues of more than $5 billion.
APPLE COMPUTER INC. Steve Jobs and partner Steve Wozniak sold a Volkswagen van and a Hewlett-Packard programmable calculator to raise $1,350 in seed capital and built the first Apple I PC in Atari-employee Jobs's garage in 1976.
THE BLACK & DECKER CORP. Started for $1,200 in 1910, the $5-billion tool manufacturer ensured its success in 1916, when its founding partners realized that there was greater demand for electric drills than for their original products, which included a milk-bottle-cap machine.
THE COCA-COLA CO. A 53-year-old Atlanta pharmacist, John S. Pemberton, invented a soft drink in his backyard on May 8, 1886. In 1891, Asa Chandler, a fellow druggist, bought the company for $2,300. The company's current market capitalization: $170 billion.
DELL COMPUTER CORP. Putting little money down, Michael Dell started selling computer components from his dorm room in 1983. When his sales grew as high as $80,000 a month, he dropped out and put all his energy into the business. Dell's sales today: $7.6 billion.
DOMINO'S PIZZA INC. Tom Monaghan didn't finish college, but he stayed long enough to learn that undergrads eat a lot. He bought a small pizzeria with his brother for $900 in 1960 and expanded according to a simple strategy: locate stores near campuses or army bases, and deliver within half an hour.
EASTMAN KODAK CO. George Eastman's first private investor, Henry Alvah Strong, owned a profitable buggy-whip factory. In 1880 he put up $5,000 to capitalize Eastman, who still held a job as a bank clerk. Eastman's first Kodak $25 camera would debut in 1888.
E. & J. GALLO WINERY The famous fraternal wine makers (who invested $923 in savings and borrowed $5,000 to launch their business) had no business or wine-making experience when they rented their first warehouse, in Modesto, Calif., in 1933. They learned wine making by studying pamphlets at the local library.
HEWLETT-PACKARD CO. The first big client of HP (started for $538 in 1938) was fellow bootstrapper Walt Disney, who needed sound equipment for the production of Fantasia in 1940.
LANDS' END INC. Legend has it that founder Gary Comer was so poor, he couldn't order a reprint after he discovered a typo in the first catalog, in 1963. Hence, the perennially misplaced apostrophe.
MARRIOTT INTERNATIONAL INC. J. Willard "Bill" Marriott, his fiancÉe, and a partner started a nine-seat A&W soda fountain with $3,000 on May 20, 1927. They demonstrated a knack for hospitality and clever marketing from the beginning, attracting a day-one crowd by playing a radio that continuously updated patrons on the progress of Lindbergh's first trans-Atlantic flight.
MICROSOFT CORP. Harvard dropout Bill Gates and his high school sidekick Paul Allen moved into an Albuquerque hotel room in 1975. There, they started Microsoft, writing the programming language for the first commercially available microcomputer.
NIKE INC. In the early 1960s, Philip Knight and his college track coach, William Bowerman, sold imported Japanese sneakers from the trunk of a station wagon. Start-up costs totaled $1,000. In fiscal 1996, the swoosh's sales exceeded $6.5 billion.
PAYCHEX INC. Tom Golisano's Rochester, N.Y., company was formed in 1970. Golisano bootstrapped expansion through joint ventures and franchise agreements.
UNITED PARCEL SERVICE INC. In 1907 two Seattle teenagers pooled their cash, came up with $100, and began a message- and parcel-delivery service for local merchants.
WALGREEN CO. Charles R. Walgreen Sr.'s father lent him $2,000 toward the $600 purchase price of the drugstore where he worked in 1901.
WM. WRIGLEY JR. CO. William Wrigley Jr., a young soap salesman, started selling baking soda in Chicago in 1891. To entice new customers, he threw in two packages of chewing gum with every sale. Guess what the customers were more excited about?