Every day people start businesses. Today I am going to talk about the real businesses, not the home based small business that you do part time, but a business where you hire people, you work at it, you create systems and build something that has long term value. This will be the first in a series of blogs about this subject. HOW TO BUILD A BUSINESS ON A SHOESTRING. AKA Bootstrapping.
When I see people doing this I see two VERY different type of people. I see the first type, the people who have worked in the corporate world for a long time who decided they can do it better. Then I see the people who just have an idea that they think will make a lot of money, and they have the drive and will to make it happen even if they don’t have much money. The biggest difference between these two is the amount of money they will spend and blow through.
The Corporate Guy
Lets assume that both guys want to start a web design company. (The following is a true story, I know the guy well, the numbers are correct.) The corporate guy sits down and start to think about what he will need to run his business, he thinks about all the tools he had at his last company and starts to write a list. He needs a conference room, he need a high end server with redundancy and $10,000 of software to make it all work. He need high end printers to show samples to customers he need an impressive office so that he can hire the best talent. He spends $80,000 on furniture and making his office suite look great, he then hires 3 techs to sit down and create logo generation software, scripts to automate the entire interview process with the customer. All things he was used to. His techs also generate templates, then he goes out and advertises his services in many different mediums, he started with $150,000 and that is long gone, he has borrowed $100,000 more and has monthly expenses of over $25,000. He gets some calls and some business but even with $10,000 coming in each month he quickly runs out of money, gets rid of his staff to reduce expenses but it is too late, he can’t pay the bills and after only 10 months he is our of business, he lost his $150,000 the $100,000 of his investor and he has bills to his landlord and other people who gave him things on credit for another $80,000. And about 300 customer who paid for sites were left with nothing. (I know all of this is true, he STILL owes me over $15,000)
The bootstrapper.
Next is the story of another guy that I know, he is a bootstraper, a real entrepreneur. He also decided to build a web design question, he asked himself, “What is the minimum that I need to really function?” The answer is a nice desk, nice chair with a nice computer loaded with the proper software. He does not need to host the server locally, he can host it at one of the many hosting companies for about $200 per year or less. Every time he sells 25 web sites he needs to pay $200 again but that is ok, he will be making money then. He does not need an office, he can meet the customers at their office, or just over the phone. He needs very little to get started. He does not make an automated system for customer interaction, he just talks to them and finds out what they need. He finds free advertising, and starts getting word of mouth. His costs are lower so he charges less than the other guys but not too little to kill his business. He saves most of his money so that his business can grow.
After a few months he has enough money for a small office, he finds a few people who are young and eager to learn, maybe not top talent, but people he can train from scratch and pay less than going rates People who have a good attitude and are sharp. He hires some sales people paying them 100% on commission so that he only pays out when he makes money. 9 months into his business he has a few hundred customers a small staff and a nice office. He brings in 50 new customers a month at an average of $600, making 30k per month, with expenses under 10k per month he is quickly building his networth, and building his company. He also has a business that can run without him, he can start to take time off, and if he got a bit bigger and put all the systems in writing and have everyone follow it he could even sell the business for huge money.
Findings
I would always invest in a bootstrapper well before I invested in a corporate guy, the problem is that the bootstrappers almost always don’t ask for money but when they do you should listen. One company that was a bootstrap company, that did everything in house and did it on the cheap was Google. 1000’s of other companies started up in Silicon Valley with tons of different ideas but most were run by people who could simply not be frugal, they needed the fancy cars, and parties and cool offices. Most of these companies failed.
When you are looking for a company to invest in look to see if they are a bootstrapper. Don’t be impressed with the fancy office or cars, be scared. If you are running your own business or looking to start one think about what is really need to make your business money, don’t spend money that you have not made yet unless it is 100% needed.
Over the next few weeks I will write blogs about bootstrapping, simply click on the bootstrap Category to see the other entries.