During his first two years in business, Mark Nelson, founder of Ovid Technologies, had a simple morning routine: Wake up at 7 a.m. Wake up sister sleeping in next (and only other) room in the apartment. Push mattresses up against the wall. Begin manning phones.
Nelson, whose company electronically catalogues vast amounts of medical data, would have preferred a more glamorous first office. Problem was, he said, "there wasn't really any start-up money."
So he forewent a fancy office for his apartment in Manhattan's Spanish Harlem, where drive-by shootings were a weekly occurrence. As his business grew, Nelson simply rented more apartments in his building, until computer network wires snaked in and out of windows and through the halls. To make up for low salaries, Nelson allowed employees to live in their offices rent-free.
Nelson, who sold his business in October for $200 million, is what the entrepreneurial world considers a bootstrapper -- someone who builds a company almost from nothing, taking no outside start-up money. These gritty entrepreneurs shun venture capital, which might force them to give up too much control of their companies, takes too long to secure or simply can't be had due to their inexperience.
The concept is quite simple -- "maximizing cash in, and minimizing cash out," said Brad Dawson, founder of Dawson Associates, a consulting firm in Reston that teaches entrepreneurs how to fund their company's growth internally.
Successful bootstrappers, he noted, carefully weigh return on investment before making even the smallest purchases. And, most important, they do not fall into the trap of "cozy comforts," he said, a common mistake made especially by those who have fled large corporations but seem to want to replicate their former environment by purchasing thinks like artwork and plush furniture.
Nelson endured summers with no air conditioning, even though leaving the windows open meant he and his sister would often have to hole up in the bathroom with the phone so customers on the other end of the line would not hear the constant whine of police sirens. (He did spend money on tipping the building superintendent -- especially after his computer network sapped the building's power -- to keep him from complaining to local authorities.)
Instead of borrowing to buy the computers on which he loaded his custom software (in 1987, few of the libraries he served had their own), he collected partial payment from his customers up front. He took that cash to buy computer parts and worked into the wee hours to build the PCs. That saved nearly $2,500 per computer, he figures.
By 1994, Ovid had 150 employees and, for the first time, Nelson sought outside investment. He took the firm public that year, raising about $10 million. By then he had moved out of Spanish Harlem, where, he bragged, "people said we were the fastest-growing business in the neighborhood besides the crack dealers."
Shortly before the initial public offering, Ovid moved into a converted fur vault, formerly owned by a company called Fred the Furrier. "Very cheap," Nelson is quick to point out. Ovid still rents space in the neighborhood, alongside several other software companies.
We asked some successful bootstrappers how they were able to build their companies on a shoestring budget, with no outside start-up money. Here are some of their tips:
Train employees to be experts -- don't buy outside expertise unless you have no other option.
Entice potential employees with performance-based compensation plans and bonuses rather than high salaries.
When at all possible, don't outsource what you can do yourself, even if it means jumping on your bike rather than calling a courier service.
Tap into the mom-dad market. Stay-at-home parents are a great part-time labor pool.
Give the company checkbook to the tightwad.
Don't buy for the future. Buy only what you need right now.
Tell your customers that your policy is to collect at least partial payment up front and that you will give them below-market prices because of this policy.
Sell yourself to your vendors as you would to your customers -- convince them they will be thankful they did business with you (and allowed you to pay in 60 days, rather than 30) because you'll remember them when you make it big. Pay early when you can.