This true life stories will interest you if you want to be a business owner anytime soon.. Building a Company the Hard Way - BY TOM FOSTER Most of the fastest-growing companies in the U.S. launched using founders savings, sweat, and prayer. They wouldnt have it any other way. When Tough Mudder CEO and founder Will Dean was attending Harvard Business School, his class read a paper called Rich Versus King: The Entrepreneurs Dilemma, written by one of the schools professors. The paper posed a simple question: As a founder, do you want to make lots of money or be the king? Because, the paper argued, if you want to get rich, you will likely need investors, you will need to spend heavily to fund growth, and if everything works out, you will end up with a small piece of a very big pie--but you will probably be replaced as CEO. If you want to be king, you can self-fund your company and avoid giving up equity and power, but you will end up with a big slice of a small pie. The paper irked Dean. Its an incredibly leading question, he says, in an English accent that sounds too proper for a guy whose company produces a series of physical-endurance events that force people through obstacles with names such as Arctic Enema and Electroshock Therapy. Implicit is the assumption that a small bootstrapped organization wont get large, but if you take money you can have a rocketship. Dean felt that belief underpinned many of the teachings of business school. The popular business press was no better, he thought, with its tendency to focus on venture capital backed startups. He wanted to prove the orthodoxy wrong. Tough Mudder wasnt exactly an obvious idea for a big business, and once again Dean found himself at odds with the Harvard crowd, who advised him not to pursue it and get a real job. In 2009, he and his co-founder plowed ahead anyway. They each put up $10,000 of their personal savings to start the company. They found a venue for the first contest by driving around Pennsylvania and sleeping in the car to save money. They built a website, paid legal costs, and bought Facebook ads. They were down to $1,000 in the bank when they started selling the competitions 4,500 tickets--and they immediately sold out. We didnt look back from there, Dean says. Today, Dean presides over a company that landed at No. 65 on the 2014 Inc. 500 list. Tough Mudder, based in Brooklyn, New York, brought in $107.9 million last year and has grown 4,737.5 percent since 2010. About 1.5 million people have participated in Tough Mudder events. More impressive, the company has been profitable every year since its inception. So much for Rich versus King. There were some gnarly times in the beginning, and I didnt know how wed get out of it.Ron Penna, Quest Nutrition Thats not to say that venture funding isnt an effective tool to rapidly build a company. Seven percent of the Inc. 500 companies are venture backed, compared with just 2 percent in the general small-business universe. Yet the fact remains that the vast majority of the fastest-growing private companies in the U.S. are bootstrapped. Sixty percent of Inc. 500 CEOs launched their first companies with less than $10,000. And this majority is reflected in the rest of the entrepreneurial population. Still, talk of venture capital--what it is, how to get it, how to spend it--dominates the conversation in popular media and business schools. That might explain the fair amount of righteous indignation that floats to the surface when bootstrappers talk about how they built their companies, versus how the venture-backed guys did. From the vantage of bootstrappers, the entire venture capital ecosystem is set up in the investors favor. The way they see it, venture firms need a few big hits to cover all their investments that flop, so VCs encourage their portfolio companies to take big risks and aggressively pursue growth, even before theres a viable revenue model. Probably one of the biggest differences between self-funded companies and venture-backed companies is personal risk management, says Mariano Lopez, the founder of Analytica (No. 81), a Washington, D.C., IT solutions firm. When you raise all this money, you think you have to spend it. You have all these things you want to do, but you dont necessarily have the processes and controls in place to do them the right way. For bootstrappers, getting ahead of themselves is not a financially viable option. Bootstrapping means focusing on cash flow, minimizing expenses, and maximizing accounts receivable, says Rachel Everett, the founder of Viderity (No. 68), a Washington, D.C.-based consultancy that provides IT services for public-sector clients. (She started it with $3,000.) She calls that devotion to the most basic Business 101 principles an inherent self-control mechanism for growth. Whats more, Inc. 500 bootstrappers believe that self-funding creates a different, more fundamentally sound kind of company--more frugal, customer-focused, and bottom-line driven from Day One. And they get to the keep all the equity. Of course, these founders earned every penny of that equity. Bootstrapping is legendarily hard, requiring sacrifices that most people wouldnt dream of making. Surely, in their darkest moments, these CEOs must have considered giving up some equity for money and peace of mind. But they never did it. Instead, they persevered and achieved Inc. 500 status without giving up either royalty or riches. Hacking to Greatness Mariano Lopez remembers Analyticas early days well--how could he forget? Before he even launched, he eliminated every possible personal expense. He rented out his apartment and moved into a friends basement in the middle of nowhere, he says. He stopped going out with friends and never used a credit card. You have to cut out all the things that you got used to when you worked for someone else, he says. You keep liabilities extremely low and make sure whatever income you have can be diverted to the business or to cover fixed costs. When he launched, Lopez was a one-man show running as lean an operation as he could possibly muster. He built his companys website and did all the sales and accounting himself. I spent a year and a half working 8 to 5 on customer projects, and then worked 5 to midnight doing business development, Lopez says. His devotion to the companys bottom line paid off handsomely. Analytica had revenue of $15 million in 2013, grew 4,056.2 percent from 2010, and today has 28 employees. That level of sacrifice is typical for Inc. 500 bootstrappers. But bootstrapped startups require more than just sacrifice--they demand dedication, guts, and ingenuity. For Quest Nutrition (No. 2), a Southern California-based maker of protein energy bars, going from concept to market required an incredible--and, to outside observers, seemingly foolhardy--commitment to the original vision. Ron Penna, Mike Osborn, and Tom Bilyeu, disaffected software-industry veterans, were looking for something they could be passionate about. That something turned out to be the nutrition bars that Pennas wife, Shannan, then a fitness trainer, made at home. They got raves from his co-workers whenever he brought a batch to the office. As health-conscious guys, the co-founders were frustrated that all the nutrition bars they found on the market were loaded with sugar. The three initially invested a few thousand dollars in ingredients and started experimenting in a commercial kitchen to mass-produce the bars--but they quickly found that they would need to move to a factory setting if they ever wanted to grow into a real business. But every contract manufacturer they contacted told them that what they were trying to make was impossible; they would have to add a lot of sugar to the product in order to help it slide through the machinery easily. Theyd say, Just call it evaporated cane juice, and nobody will know, Penna remembers. Quest was founded with a strong health mission, though. If Penna, Osborn, and Bilyeu wanted to follow through on it, they would have to buy their own manufacturing equipment, a $120,000 investment of their personal money. The machinery quickly turned from financial burden to disaster. The new equipment proved to be no more adept at producing a nonsugary product than the machines other factories used. What followed was six weeks of utter heartbreak and hopelessness, Penna says. The men would spend six or seven hours trying to make the setup work and end up with just a few hundred bars, fewer than they could make in their kitchen in five hours. The moment the company was truly born was when Osborn showed up with a saw and a blowtorch, dismantled the expensive machinery the three of them had bought, and set about reengineering it to their purposes. That was the birth of the Quest spirit, Penna says. Never say never. Never quit. There were some gnarly times in the beginning, and I didnt know how wed get out of it. But we just wouldnt stop. Today, Quest employs almost 200 people, and its 2013 revenue was more than $82 million. Commitment to a singular vision doesnt just guide bootstrappers through tough challenges. It can also help them steer clear of trouble spots, especially when theyre not in a financial position to take expensive detours. We knew the day we were going to go bankrupt…we were just a few weeks from the brink.Chris White, ISS Matt Kendrall and Andrew Crichton co-founded San Francisco-based Levitate Media (No. 237) in 2009, with a mission to produce high-quality live-action and animated promotional videos for tech companies, to help them explain often-complicated concepts in easy-to-digest ways. From his years working in sales and business development for tech companies, Kendrall knew there was a gap in the video-production industry: Plenty of outfits had the technical skills to create great videos, but he always had trouble finding any that were good at translating tech companies ideas into laymans terms. As Levitate grew and produced videos for clients including Autodesk, Hewlett-Packard, and SAP, the inevitable opportunities to get clients outside of the tech sector emerged. One of the biggest struggles for us has been that we have a great idea and its working, so can we deviate to nontech companies? Kendrall says. We attempted it, and we came out of it realizing we looked like any other production company. We needed to stay true to our original vision. It might seem micro to focus on technology, but its not. There are a lot of companies that qualify as tech. We do biotech, software, IT consulting, aerospace. Videritys Everett calls the temptation to pursue noncore opportunities letting your vision go fuzzy. If you lose focus, she says, youll soon find out that youre being dragged around by external factors, rather than controlling your own trajectory toward the crisp vision you initially set when you bootstrapped your company. Know exactly where your destination is, and keep your eye on it while you juggle your way there. I often get offers for new projects that are hard to resist--but I do resist if they are likely to cloud the big picture. She says that keeping a sharp focus ensures that as you grow you have the right clients and projects, and can deliver work of the highest quality. The Moment of Truth For many bootstrapping founders, fully committing to their vision is the biggest challenge. Theyre not only betting the new company, theyre betting their livelihood, and the hardest part is getting over the fear of going all in. For Chris White of Tyler, Texas, success didnt come until he had spent years maintaining his day job while spending all his free time building his company, Innovative Surveillance Solutions (No. 45), on the side. White started ISS in 2006, with about $5,000 of savings he and his wife could hardly spare. Back then, White was a captain in the Cherokee County sheriffs office, and like many of his colleagues, he supplemented his income by moonlighting as a private security guard, often for oil and gas companies. Like most law-enforcement agencies, the sheriffs office acted as a sort of clearing-house for those kinds of side gigs, and White was the point person. As he took jobs himself and connected his colleagues with opportunities, he realized there was a need for a more professional clearing-house that could cross jurisdictional boundaries. So he decided to create one. It was slow going. White took much of the proceeds from his own moonlighting and plowed it back into the new business over the course of 2007, printing brochures and traveling to meet potential clients. Then the recession hit: Companies started slashing their security budgets, and his sheriffs office stopped giving officers comp time when they hit a certain number of hours, which depleted Whites labor supply. Meanwhile, ISSs overhead costs, including its liability insurance and car insurance, didnt go away. By 2009, White and his wife, Brandy, were selling off everything they owned in order to keep the business going. They burned through the savings they had set aside for their kids, as well as some money Brandy had inherited when her father passed away. We knew the day we were going to go bankrupt, White says, and we reached a point where we were just a few weeks from the brink. They planted some new flowers in their front yard to ready their house for sale. Then, a potential client White had approached many times, to no avail, called with a six-week job in Arlington, Texas. He enlisted his father, Jack White, also a full-time peace officer, to help cover the work, and neither of the men paid themselves for it, instead using the money to keep ISS afloat. The company made it through the winter, and then another big job--a six-monther that would require hiring 15 or 16 contractors--surfaced in Arkansas. Whites caseload at the sheriffs office, meanwhile, had suddenly ballooned, and he found himself faced with the hard reality that he would have to choose between continuing there or following his entrepreneurial dream. White and his wife prayed hard about the issue, and one day he consulted his younger brother Ben Poch, a successful Internet advertising executive in Dallas. I didnt even graduate from junior college, White says, but my brother has had a lot of success, and hes been an incredible influence on me. He told me something very profound--he said, Chris, if you pursue this opportunity and it doesnt work, what are you going to do? I said Id keep my peace officer license and probably pursue another job in law enforcement, maybe in the Dallas area. That would probably pay more than I currently made in Cherokee County, he pointed out. So really, he said, you are right now living your worst-case scenario. Youve gone out there and tried to make this business work, and now youre ready to flee back to law enforcement--except youre leaving out the part where you actually pursue the biggest opportunity. White informed the sheriffs office that he was resigning and took the leap. By 2011, ISS was diversifying its services from security to safety compliance, surveillance, and internal investigations. One job led to another and another, and the company has grown 5,604.8 percent since White quit his day job. ISS brought in more than $10 million in 2013, from jobs in 20 states. The company has about 20 full-time employees and as many as 500 contractors working in the field any given week. White and his wife are the sole owners. He still gets nervous sometimes, but these days, its when he realizes how high hes climbed. Who wouldnt get nervous ironing out a new contract in the 50th-floor conference room of a Fortune 500 company? FROM THE SEPTEMBER 2014 ISSUE OF INC. MAGAZINE
Posted on: Wed, 27 Aug 2014 10:02:26 +0000
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