Of Shoestrings and Bootstraps: How to Start a Business Without Investors

As a follow up to my recent post on starting a business without breaking the bank, here is another example of a successful business that is being successfully built without angels, venture capital, or other outside investors.  For this entrepreneur, maintaining control over decision-making and keeping the employees engaged through their own ownership stakes seem to be the key to their success. While the founder has to give up some ownership in either case, for this company, giving up value to the employees made for a stronger organization. As she notes in the interview, there may be a time to take on experienced investors at some point in the company's development - so called "smart capital" because with the money comes the expertise of seasoned investors and often former entrepreneurs who can provide value to building your business.  But many entrepreneurs are more reluctant to take that plunge until they have established the business and need the capital to advance to a new level.

I am curious to hear more stories of this (both successful and otherwise).  Has bootstrapping worked - or not worked - for you?

"$100 and 100,000 hours": Launching a Startup Doesn't Have to Break the Bank

I had a meeting today where we talked about the economy and the environment for entrepreneurs, and while the uncertainty in the economy is certainly not helping, the outlook is not all bad.  During the last two recessions in the early 90s and the early part of this century, new businesses sprang up in a variety of industries.  Sometimes necessity drives these ventures, such as when people start a new company after being laid off.  The times now are no different in the sense that many new entrepreneurs are looking to replace a job they used to have. But what is different this time is that many entrepreneurs do not have access to capital in the way they did in previous downturns.  The current uncertainty in the market is forcing many banks, investors, and other sources of capital to hold back.  That certainly hampers growth in industries that require large investments in inventory, real estate, or equipment, but innovation and entrepreneurship continue to find ways to thrive.

The timely article in the Wall Street Journal today about "Startups on a Shoestring" was a good reminder of the power of using creativity to overcome these kinds of obstacles to starting a business.  As I was reading it, I noted two important take-aways for entrepreneurs looking to launch a new venture.  First, that successful businesses can be started with such small amounts of capital.  I have worked with clients who started the same way: they took an idea and nurtured it through bootstrapping and hard work.  Second, the article

First, this is a good reminder that starting a company does not always require a large, upfront investment of money.  There are many businesses that have started and thrived on much less.  I have noted before that there is nothing like bootstrapping to focus a founder on what is really critical for the development of the business, and to maintain your flexibility and control for the future.

Second, it is important to note that new businesses can come from anywhere.  Traditionally, there has been a lot of attention paid to technology-driven startups in the high tech, clean energy, and biotech spheres.  And certainly, almost all businesses today will have a Web presence of some kind; that is just a fact of life in today's economy.  But it is good to remember that a company does not need to be revolutionary to get noticed, and that "low tech" ideas like bracelets, tours, and flooring services can still turn into successful businesses.

The bottom line is that entrepreneurship and innovation can find a way to thrive is just about any economy.  While the barriers to entry may be more difficult for some industries, these stories prove that there are still ways to start a business with just an idea and some hard work.

Selling to Grow: How Selling Your Business May Help It Thrive

Startups often face a tipping point - to borrow a term from Malcolm Gladwell - where they have developed their business past the initial startup phase and now need to expand in order to remain viable. Some entrepreneurs take that opportunity to sell and move on to a new venture. Others founders will need to bring on a new management team (whether the founder recognizes that or not) that can take the company to the next level. Still other companies will require a new infusion of capital from outside investors, even though they may have to give up control of the company to do it. But another option is entering into a strategic venture. We recently represented a client that was being acquired by a larger company. This was not a situation where the founder was 'cashing out' and giving the company to someone else to manage. On the contrary, in addition to a cash payment at closing, the founder received stock in the parent company, a board seat, and the ability to control his company going forward. (Some of the details of which are very interesting and will be the subject of a future blog post.) So the company that he founded would continue to build by leveraging the resources, management, and stronger platform of the larger parent, and all under his watch. A real win-win for the founder.

After the closing, the founder told me that the day before, he was just an entrepreneur trying to build a startup, but now he was "kind of a rich guy" who would be managing a growing business with a high profile company. By using this structure, he was able to cash out some of his equity in the company and continue to enjoy the growth of his investment while maintaining control as part of the larger organization. This could be a great alternative for many startups that need outside involvement but want to maintain control as their companies continue to grow.

Leave 'Going it Alone' for Euchre and Call Your Lawyer Already

First off, for those of you who are not from the midwest, Euchre is a card game.  And contrary to the views of my (NJ-born) wife, it is a great card game.  It is played with four people on two teams.  You work with a partner to choose trump over your opponents and hope that you pick up the two bowers (okay, I can see why my wife was confused).  One of the riskiest moves in the game is to 'go alone' by having your partner drop his cards and you take on the other pair by yourself.  If you are successful, you pick up four points (trust me, that is good).  But if you are not, then you give up points to your opponents. It works the same way with businesses.  Companies who chose to go alone without counsel are taking an even bigger risk.  I recently worked on three different deals, each of which came to me after the terms had been decided and reduced to a term sheet.  In each case, the deal as envisioned by the parties did not hold up.  In one, the tax issue created was a deal killer and the entire structure had to be renegotiated.  In another, the parties were very excited to jump into a deal together, but after asking a few questions, they had to rethink their prior agreement.  The third went forward despite the risks.

The point of this is that it doesn't have to be this way.  While your company may be experiencing a financing, an acquisition, or some other transaction for the first time, lawyers, accountants, and other professionals have been there many times before and can give you the benefit of that experience.

"But we just couldn't afford to bring in a lawyer early on.  Plus, we were just negotiating the business deal."

I certainly understand the concern.  Lawyers are just speed bumps on the way to completing deals.  That is why when I went skydiving for the first time, I decided to skip the guide and the training (just an extra expense).  I grabbed a pilot and a bed sheet and jumped.  (OK, in full disclosure, I have never been skydiving.  But would definitely seek expert advice before doing so because it would just be crazy not too.)

So don't be crazy.  In each of those deals, the parties ended up spending far more money and emotional capital trying to fix their original mistakes than they would have setting up the deal properly from the start.  Don't go alone.  Use your partner.

Turning up the (Flame-Broiled) Heat: How an effective franchise organization should NOT be run

I have commented previously on the ongoing feud between Burger King management and its franchisee association, which represents most of the franchisees in the Burger King system.  It appears they have not learned their lesson and are still going at it. According to a report in the Wall Street Journal, the leaders of the franchisee association sent a blistering rebuke to BK management over $1 double cheeseburgers, soda revenue sharing, and other things. The relationship is sour enough that management retorted not to the association itself, but directly to the franchisees in the system.  In fact, it seems that the only communication that is occurring between the company and the association is through a number of law suits that are currently being traded back and forth.

Franchisee associations are designed to be powerful allies in growing a brand and strengthening the system.  They serve as the common voice of the franchisees, collaborate on national advertising funds, and help guide effective franchise policy, which overall encourages more franchisees and adds to a stronger bottom line for all of its independent owners.

But in the Burger King example, their ongoing disputes have actually had the opposite effect and are now harming the business.  The WSJ noted that Credit Suisse and Oppenheimer & Co. have both downgraded BK stock over these squabbles. And the company had better hope that prospective franchisees are not turned off by the dispute since franchisees account for 90% of the Burger King restaurants.

Clearly this is a topic that stresses the terms of a franchise contract as others have noted.

So much for havin' it your way.