Reposted from Business First (Business First 29 April 2011 PDF)
WHEN YOU SEEK investors to start a company, you give away control and profit. That’s not acceptable or necessary for some business owners, who get going on a lean budget often funded personally.
BY CINDY BENT FINDLAY | FOR BUSINESS FIRST
Technology has made creating a business out of little more than time and electrons more feasible than ever.
Many entrepreneurs chase the dream of finding millions in venture capital to launch their product. But those who’ve been there before say bootstrapping – pulling a business up “by its bootstraps” with little or no startup cost – is a model well worth considering.
“I think many entrepreneurs think they need venture capital and they don’t completely understand what that entails,” said Will Indest, vice president of venture development for TechColumbus, the regional high-tech advocacy nonprofit and incubator. “First, it’s hard to get. Generally there are not investors chasing companies – it’s the other way around.
“Then, I think a lot of times when people realize what venture capital is, what you have to give up, they go another route. The thing is to find a way to get the best capital into the company, and that’s to sell something to somebody,” he said.
Some concepts, such as medical devices or high-tech materials, take years to develop and have high startup costs that require big upfront investments, all before products ever reach the market – if they ever do.
“But in the web world, people don’t need as much cash to test market assumptions as you used to. It’s cheaper to host, build and manage websites, making it more possible to bootstrap,” said Rob Emrich. Emrich speaks from experience. He’s in talks to sell his fourth self-funded startup, Bulx, a private sale website for high-end home goods.
“If we had started this same company in 1998, the market would be smaller, hosting ex- pensive. Web engineers and technology would be more ex- pensive,” Emrich said.
The first business Emrich bootstrapped was a nonprofit, Road of Life, which he started after losing a sister and a cousin to cancer.
“It was a classic entrepreneur story – I sold my car, my stocks, hired a friend, and with $2,500 we set out with the goal to make a difference in the fight against cancer,” Emrich said.
He started the company, which creates health education content for use in schools, in 2002 when still a senior at Ohio State University. He had the help of friends and enthusiastic college interns. Emrich said Road of Life has distributed curricula aimed at cancer prevention to more than 250,000 students.
Emrich’s next entrepreneurial venture was Speakersite, an online, au-tomated market for public speakers which he founded with Artie Isaac, founder of advertising agency Young Isaac, which later was acquired by People to My Site. Emrich said they started that business almost solely with time.
Emrich said the key to starting Speakersite with very little financial investment was to build up a social network of speakers that could become the inventory. Social media made it possible to listen closely to what the market wanted and let the product evolve, he said.
Speakersite now helps 4,000 public speakers find gigs and takes a small commission from each. Emrich also started Boundaryless Brands, a business-to-business e-commerce firm. Both are housed at TechColumbus and both, he said, have been profitable from the beginning.
In building Speakersite, Emrich and his team tested the assumption that speakers would be willing to pay for online listings and then asked what those speakers would want out of a membership.
“The answer we got back was ‘Help me get more jobs.’ So we built a business around that,” Emrich said.
If he’d started the business with a big bang of capital, Emrich said, he probably would not have the flexibility to let the company evolve into its most profitable possibilities.
“The bootstrapping route is basically about having a testable set of assumptions, proving or disproving them, and moving forward,” Emrich said.
GOING HOME SOBBING
The second key to bootstrapping a business is to put as much revenue back into the company as possible, Emrich said, and not expect a return quickly.
Jeni Britton Bauer came to some of the same conclusions about her business, Jeni’s Splendid Ice Creams, although she didn’t intend to start out that way.
Bauer said in the beginning, it was clear her calling was to make transcendent ice cream, not necessarily to build an empire. And the process of slowly growing her business in a method as homemade as her ice cream was born of necessity.
Bauer and her husband (then boyfriend) scrimped and saved to purchase a $1,200 ice cream maker and made batch after batch of her best, and then presented it to a family friend who she hoped to convince to invest enough to help her start a stand in the North Market.
“They loved it. They offered me the money, but then my friend said – ‘But don’t take it. If I give you money I’m going to want something back, part of your company. Go find the money somewhere else.’ I went home sobbing,” Bauer says.
Bauer realized her friend was right. She ground out a business plan and the beginnings of a wholesale client base of local restaurants. Fear of failure – Bauer had already been a part of one failed ice cream shop – kept her focus on selling what she had and putting as much back into the business as possible.
A year of wholesaling and loan applications later, she said, she and her husband won a Small Business Administration loan and Jeni’s was born.
Fast forward eight and a half years, and Bauer’s company has 10 locations, $5.8 million in 2010 sales, and a book coming out through one of the world’s premier cookbook publishers, Workman.
But constant reinvestment in the business and ultraconservative use of resources and debt have been the keys to success.
“And I mean you have to outgrow resources by like a year before you buy anything else,” Bauer said. “I always think we should be happy to have what we have. If we were in Tokyo, we’d be doing twice what we do with half the space.”
GOING YOUR OWN WAY
Jeni’s brought in John Lowe as CEO in 2009 to allow Bauer to chart the creative side of the business, but the company has not taken a dime in outside capital through the long climb to success, despite frequent inquiries from hopeful financiers.
“Our growth will be lumpy,” said Lowe. “We will almost always grow to a point that it is time for us to add people or infrastructure, and then we place another bet that we can afford that. Each little step in growth is a risk for us so we have to be cautious about the way we spend the money or reinvest in the company.”
Bauer said looking back, she would not have started any other way. She’s always intended Jeni’s to be her career for life, and venture capital would mean letting go.
But just as importantly, Jeni’s wouldn’t be what it is with the pressure outside funding brings.
“If we decide to make ice cream that is ungodly expensive to make, like goat cheese with cognac and figs, we can do so. And we don’t have to answer to someone else about the bottom line,” Lowe said.
“If we’d had $6 million to start, the whole business would have been totally different,” Bauer said. “We’d have wanted to be big fast. I wouldn’t have worked the front line for eight years like I did, made the connections that I did. You don’t get any of that culture. You have to find a way that works immediately to satisfy your investors and worry about 20 percent growth and 20 percent profit, which we’ve never done. Our standards of success are completely different than that world.”
CINDY BENT FINDLAY is a freelance writer.