The reading level for this article is Novice
When a company is started, unless there is ample financing, often the owner will find himself or herself all alone for a while until sales start picking up and cash flow can support hiring help. My friend Aaron Houghton once told me, “As a start-up CEO you are the Chief Executive Officer, Chief Executive Painter, and Chief Executive Janitor.” Now, clearly this is not the case if you are backed by venture capital or have enough funds to bankroll a staff. However, many people simply do not have much capital they can invest, do not have access to venture capitalists, or simply wish to avoid going into debt or selling off part of their company. Office space for these people, at least at first, often consists of dorm rooms, garages, or third bedrooms.
So how does one get past this start-up phase? What are some ways to start building cash flow? And at what point does one invest in things like office space, intellectual property protection, accounting software, inventory, or employees?
Well, in August 2001, I met with a man who had founded a number of companies, and was working on his next. For confidentiality reasons, I’ll call this man simply Mr. R. When I came aboard, everything had been put in place and the groundwork had been done. Mr. R had a product and had spent the past year laying the foundation for the company that would sell that product. Only a few hundred dollars in sales had been made to that point, but things were ready to take off.
I worked with Mr. R until August 2002. At that point it was clear to see that he had done his groundwork well. By that time, the company had made over $800,000 in sales on that one product, with a 51% profit margin, and no outside financing or venture capital. This was a bootstrapped company from start to finish, and man did it succeed. So what tips would Mr. R give to someone without too much capital going through that initial start-up phase? Well, I had the chance to ask Mr. R just this. Here’s what he said.
First of all, if you are on a tight budget, be ever mindful that the last thing you need is overhead. Don’t put the cart before the horse. Find a product. There are products out there. Look through the classifieds. There are people out there who have wonderful products but do not know how to market them. Contact these individuals and make them an offer. Give them a small piece of the action and buy the product out from them or license it. If you do not have money, find investors. Just make sure you retain control of the company. There are books available that can show you how to draft sample agreements like this.
The small entrepreneur simply needs to learn that much can happen in their own garage. You can take a product, spend a minimal amount of money to get a label on it and packaging and take it out door to door to small shops. Go to these shops and tell them you’d like to put the product in on consignment basis. Here you may run into trouble with stores asking for credit, but do what you can and extend credit if you are able to get some initial cash flow.
Then take your product and sell it to your friends. If your product is as good as you say it is those same friends are going to be telling their friends. You can build off a simple little platform like this.
Then build your web site, get an affiliate program going, and go from there. The key is finding a superior product that can be manufactured at a very low cost. The typical successful television product needs a seven times markup, 700%. Educate yourself about markups and costs.
Packaging is essential. Spend more on your packaging and written materials. If you cannot write, go find a copywriter that can. Get out and talk to people and get feedback on your product as often as you can.
If you have a superior product, you’ll win the battle. If you do not, odds are you are going to lose.
Learn to do what you can yourself. Don’t walk into a lawyer’s office and spend $2500 needlessly. Find an incorporation mill that can do it for $250. Learn how to write copy, that’s really essential.
If you make a mistake, be sure to learn from that mistake. If you fail, be sure you learn from the failure. I’ve not known a successful entrepreneur that didn’t have four or five failures. I might be a notable exception. I’ve only failed two or three times [laugh].
Just keep punching. It’s tenacity that wins.
Very powerful words from a man that built a very successful company. If you find yourself in a position without too much money, but do not want to take on debt or sell off stock, internalize these words.
Doing the foundational groundwork for a new company can take time. Common jobs include sourcing products, filing articles of incorporation, printing letterhead, business cards, and brochures, writing sales copy, finding office space, developing a web site, negotiating contracts with suppliers, purchasing an initial inventory, registering a trademark, and buying office supplies, among many others.
In August 2001, when I began work to work with Mr. R, there was not enough cash flow to hire any employees yet, so he and I had to do everything. The CEO and janitor saying rang true indeed for Mr. R, while I was a jack-of-all-trades myself. I handled all the emails, the phones, the packaging of orders, the marketing, the walk-in customers, the affiliates, and the web site. Mr. R handled the bankers, the forms, the accounting, and the most important customers. By no means were we in Silicon Valley in 1999 and by no means did the company have millions of dollars of venture capital.
After incorporating, Mr. R went five months before obtaining office space and eleven months before bringing in any outside help. After bringing me on as an independent contractor, no one else was hired for three additional months.
Soon enough, however, we were lucky enough to begin to have enough orders for the product to require a part-time person to package the orders and take them down to the post office. This position soon became full-time as more and more orders came in. This person also kept track of the inventory of all supplies and reordered items as needed.
By February of 2002, the company had grown to the point where I was spending much of my time answering the phones and emails instead of marketing. At this point, the company hired someone to take care of customer service. This person took over all the customer service emails and answered the phones, allowing me to concentrate on growing sales. In April, the company hired was able to hire an eventual replacement for me – someone that I could train in my marketing methodology and practices before I left for college that August.
Finally, in July the Mr. R brought on an accountant to take over as Chief Financial Officer. The company at that point was having trouble with the merchant account processor and the expenses were starting to grow. The CFO handled payroll, took checks to the bank, and went over the expense reports and merchant account figures with a fine-toothed comb.
Mr. R recommends that once your sales get to the $100,000 per month level that a full-time accountant should be hired. While one may think it difficult to get to this sales level, if one has a good enough product, good enough marketing systems, and has done the groundwork well, he or should be able to get to this level in a matter of months. It took Mr. R’s company just nine.
Start with a good product, do the groundwork and due diligence well, don’t skimp on good advisors, put the proper marketing systems into place, get the right people on your team, then mix in a little time and an ounce of perseverance. Finally, just remember as you toil away endless days and endless nights on your dream, on your baby, on your future million dollar company, that the entrepreneurial gods are with you, and cheering you on every step of the way.
Note: For more information on exactly how Mr. R’s company went from $0 in sales to $1,000,000 in fourteen months with a 51% profit margin, no debt, no venture capital, and just three employees, do be sure read my upcoming book Zero to One Million [learn more].