Building Bootstrapping into Business Models

The myth still exists that it takes outside funding, sometimes massive outside funding, to launch a successful high growth firm. 

If you have a very capital intensive or labor intensive business model you will need a large base of funding to get off the ground.  But for most start-ups, you may be able to adjust your business model enough to cut the funding you need, while still making a successful launch.

One example comes from an e-mail I received about launching a children’s indoor play center.  Such facilities can take a lot of cash to launch due to the cost of facility rent and equipment costs, and the aspiring entrepreneur had no ready source of cash.

My response is that there are no ready outside sources of cash out there for new start-ups like this. The only real options are to use money from your savings or to tap into friends and family who would be willing to invest.

If the entrepreneur wanting to start the indoor play center cannot raise the money to launch the program fully formed, there are other options.  She could start with a much smaller scale that fits in with the money available. Or she could develop the program she wants to run by partnering with a local facility like a YMCA.  Or she might be able to save rent expense by partnering with a local church to use their space.

The point is that some modest tweaks to the business model may bring costs way down and still meet the need of the market.  Once the bootstrapped launch of the play center is cash flow positive, all kinds of options for growing and expanding emerge.

John Wark sent along a great example of how bootstrapping did not stop a new venture called Logik from making the Inc 500.  Logik is one of the firms featured in a series at the blog 37signals called “Bootstrapped, Profitable and Proud.”

According to the interview, Logik launched with only $20,000 from savings and credit cards (NOTE:  I am not a fan of using credit cards to start businesses).  It was profitable within nine months.  And did the bootstrapping limit their ability to grow, as it often commonly assumed?

“Financially, we’ve been very successful considering our size relative to the
competition (most have close to or well over 100 employees, we have 16)…. [F]rom 2005 to 2008 we grew revenue by 1,067% from $373,866 in
2005 to $4.4 million in 2008 with about $3 million in profit. We did that with 8
employees, a ton of servers, niche software, and 1 dog. This, minus the profit,
is all public information now. We were ranked
#181 overall on the 2009 Inc 500 survey and #1 for eDiscovery companies.”

And Logik is still bootstrapping their venture to this day.  This is a great series at 37signals and is worth following for all you aspiring bootstrappers out there.

If funding is your barrier to starting your new venture, play with the business model to see if you can still create a value proposition that the market will be attracted to.  You might be surprised how much start-up capital you can save without hurting your ability to launch and grow.

Use Competitors to your Advantage

Is the fact that there is competition a reason not to start a new business?  Not if you build a realistic competitive strategy into your business model from the beginning.

One of the fatal flaws we see in business plans is when the entrepreneur is in denial about the fact that they will face competition.  Every new business faces some form of competition. 

I always chuckle whenever I read a business plan that, while admitting there are competitors out there, will dismiss them as incompetent or irrelevant.  Remember – they are already up and running and have customers, so they have must have something going for them!

Keep in mind that competition can be beneficial to your start-up business.  The competition has already built awareness about your product or service with customers.  That means you won’t have to spend marketing money educating your customers about the benefits of what you are offering them.

The competition has already spent money learning what customers really want.  You can learn from their successes and their shortcomings as you craft your business model.  

A competitive strategy should always start with the customers.  Learn how your customers make the decision on where to buy the product.  Determine the key decision making criteria they will use to choose your product over your competitors’.  It does not matter what you think they should consider in the decision – all that matters is what the customer thinks and how they actually make their choice. 

How do you gather information about what your potential customers prefer? You need to get out and talk to them, observe them, or do whatever it takes to learn how to think like they do. 

Also gather information about how well your competitors are satisfying these customers.  You can gather this information by talking to customers, visiting your competitors’ businesses, interviewing suppliers, and by meeting with others in the industry.  All of this information should shape your business model and define how you will attract customers.

Understanding the relationship that already exists between your potential customers and the existing competition helps to determine how you should enter the market. 

If your competition is strongly entrenched it may not be wise to try to compete with them directly, no matter how good you think your product is.  Think of your own buying habits.  We all get in patterns of where we like to buy things.  Changing those patterns can become quite difficult, especially if the competition has a good relationship with the customer.

Instead, it is usually better to find a niche of customers in the market.  Find a group of customers whose needs are not being met by the competition and tailor your business model to satisfy them.  They will be the easiest and least expensive to attract.

This strategy gives you the best chance of building your initial sales, while avoiding a head-on confrontation with well-established competitors that may have a much healthier bank account than your start-up business.

Healthcare Forum and Webcast

On Monday, July 26th, the U.S. Chamber of Commerce [“the Chamber”] will partner with the National Federation of Independent Business [NFIB] and the American Action Forum [“AAF”] to host a forum entitled “Behind the Curtain: The Health Care Law’s Impact on Small Business”. The event will feature Washington experts and opinion leaders, as well as the entrepreneurs who run small businesses and create American jobs. Some of the highlights will include:

  • Senator Mike Johanns (R-NE), who recently introduced S. 3758, the “Small Business Paperwork Mandate Elimination Act”, a bill to protect small business owners from the financial burden of filing the endless amount of 1099 forms the health care law requires.
  • Scott Womack, an IHOP franchisee who has created 100s of jobs, who also crunched the numbers and has serious concerns about the effects the new health care law will have on his company.
  • Doug Holtz-Eakin, president of the American Action Forum . In the past he was Director of the Congressional Budget Office, Washington’s top budget prognosticator, and he also served as the Chief Economist on the President’s Council of Economic Advisers. He will be releasing a new white paper discussing the impact the new health care law will have on small business.
  • Bill Rys and Bob Graboyes of NFIB, James Gelfand of the Chamber, and Michael Ramlet of AAF. These policy analysts will discuss important provisions in the new health care law.
  • Benefits advisor Tom Christina (Ogletree, Deakins, Nash, Smoak & Stewart, P.C.) and two entrepreneurs, Joe Olivo (Perfect Printing, Inc.) and Eric Oppenheim (Burger King franchisee). This panel will discuss how the new law is affecting their businesses.

The Chamber, NFIB, and AAF will pull back the curtain on the new law, placing the spotlight directly on the entrepreneurs who will feel the financial and regulatory impact of the health care law – some of the people who constitute the nation’s real economic engine, who are the key to creating enterprise and lifting the U.S. out of the recession.

Click here to register for this free event (to be held at Chamber headquarters), or to view the webcast from anywhere.

9 Ways to Stay Worldly-Wise

I wrote an article for American Express OPEN on how to be a global small business.  Here is an excerpt:

What will the future of small-business entrepreneurship look like? Last summer, while traveling throughout Eastern Europe with a group of students, we got a good look at it in — of all places — a remote crystal factory in a rural area of the Czech Republic.
 
The artisans of Rückl Crystal make fine leaded crystal using age-old techniques. Although they compete with mass-produced glassware from China and Poland, Rückl has survived and thrived. How, you ask? It’s simple: It sells 80 percent of its products outside of the Czech Republic, to outlets across the globe.
 
Studies show that American small businesses lag behind their international counterparts in engaging in global trade. Part of that is due to a lack of knowledge about other cultures and economies.

You can read my nine tips on how to be a more worldly small business here.

Is Washington Poised to Create Yet Another Bubble?

Remember when the government pushed banks to lend to people who could not afford mortgages?  That’s right.  We had the housing bubble that first over inflated our economy and then led to its collapse.  We have all been suffering ever since.

Well, Washington is at it again.

It seems that Fed Chief Bernanke is pushing banks to more lend to small businesses.

Lack of credit is not the problem facing small businesses right now, so using a small business government induced stimulus is not the answer.  The latest survey of business owners by the NFIB clearly supports this.  They found that 90 percent of the owners surveyed reported all their credit needs are currently being met (or they did not want to borrow). 

If we push loans to small business owners, especially new entrepreneurs who are bad credit risks, we will create yet another bubble that will inevitably burst, sending our economy into an even worse decline than we have already been experiencing.  And since small businesses have almost always led the way out of recession, such a bubble will also make the recession last much, much longer.

More Evidence that Start-ups serve as New Job Engine

“These findings imply that America should be thinking differently about the standard employment policy paradigm. Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”  (Robert E. Litan, vice president of Research and Policy at the Kauffman
Foundation, on a new study showing the overwhelming role of start-ups as the job creation engine in the economy).

Time for an Adjustment of Attitudes and Expectations

I have been observing more and more business owners who, although their businesses have survived the economic downturn, seem to be losing heart.

The stress and strain caused by these difficult times has worn on them. But doing business in today’s economy requires a steady hand, a sharp eye and most of all — a calm mind. There are four steps that can be taken to help to cope with the emotional toll of being an entrepreneur in difficult times.

First, adjust your expectations. The growth in revenues and profits that you experienced during the good times may not return for quite some time, if ever.

Don’t burden your business with unrealistic profit goals. It is time to reset your personal budgets to reflect the new reality of what your business can generate for you in terms of income. Also, be patient and understand that it will probably take longer for you to get to retirement.

Creating wealth from your business will be a longer process that will take careful management and planning.

Second, celebrate each small step forward. Set short-term, realistic milestones for your business. What can you get done this week, this month, to make modest improvements in the performance of your business?

While you still may have big dreams for your business, take the time to enjoy the smaller accomplishments. For over time, it is those small victories that will lead to achieving your long-term goals.

Third, focus on the things that really matter. There is so much more to your life than your business. Work hard at being a good spouse. Strive to become a better parent.

Pay attention to your friends. Be a good citizen in your community. These are the things that ultimately define who you are as a person, not how big you can grow your business.

Finally, let go of the things outside your control. Even under the best of times, entrepreneurs who have been well trained in what it takes to start and grow a successful business still face about a 20 percent failure rate. Failure comes from many things that you cannot predict or plan for. Call it uncertainty, call it risk, or call it plain old bad luck.

The reality of 2010 is that entrepreneurs face much tougher odds. Nationally, the prolonged recession has led to skyrocketing business failure rates. And Nashville small-business owners face the added pressures created by the recent floods. For years, I have put a prayer on the syllabus for every entrepreneurship class I teach. It reads:

“God, grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference.”

It is known by many as the “Serenity Prayer,” but I like to call it the “Entrepreneur’s Prayer” as it helps entrepreneurs remember that the best course is to focus on those things that they can control.

While times may be tough, it’s still possible to truly enjoy the entrepreneurial journey.

(This post ran as a column this week in the Tennessean).

The Risk of Missing the Boat

This Quote of the Week is the best example of opportunity cost I have come across in some time:

“When you’re at a focal point of history, you don’t realize you’re at a focal point of history.” (Ron Wayne, co-founder of Apple Computer who sold his 10% share for 0 eleven days after the corporation was formed).

Source:  CNNTech.  Thanks to Andy Tabar for passing this along.