The Secrets of Rags-to-Riches Businesses

By Susan SchreterBusiness on Main

There’s no such thing as starting up for free — but you can do it for cheap. Find out how a bootstrap approach can lead to success.

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We’ve all heard stories about entrepreneurs who start up viable businesses on a shoestring, sometimes with less than $1,000. These stories resonate with us because they prove that despite the nagging recession, anyone can take a few dollars and create a new career and a new source of income. After all, that’s the American dream.

But behind these inspirational rags-to-riches stories are some important lessons of discipline and determination. The secret sauce of their success isn’t really about the product or service they created, but what they did right during their first months in business that allowed their bootstrap approach to work.

For startup businesses that will endure, here are my top five strategies you can implement, regardless of how much money you have in the bank:

1. Put customer focus first. Effective bootstrappers understand “first things first.” They direct all their attention to securing their first paying customer rather than their first 1,000 customers. Bootstrappers understand that long-term business viability is all about fast revenue creation. This means that if you want to create a successful fashion label and company, your first step is designing and producing a garment for a first paying customer.

2. Adapt quickly to early customer feedback. I have never worked with a company, nor built a company of my own, in which the founding ideas weren’t substantially improved after first customer trials. Businesses that persevere into their second and third year of operations demonstrate restraint. They don’t gamble, but save the bulk of their marketing and advertising resources until they have the best chance of generating repeat orders from highly satisfied customers.

3. Realize that time is money too. Too often, startup entrepreneurs discount the value of all their nonpaid hours devoted to a new business. They assume that just because they don’t take a salary, there’s no cost to their business. Not so. This kind of flawed thinking distorts decision-making and product and service pricing. It also makes it a little too easy to miss deadlines or delay calls to potential customers.

My antidote is to encourage startup entrepreneurs to bill their companies for their time. Even though they may not immediately pay the bill, entrepreneurs will have an accurate understanding of just how much they have invested in their businesses and what amount of revenue generation equals genuine business success.

4. Resist spending. Simply stated, businesses close when they run out of cash. Owners of enduring businesses barter, haggle and second guess all potential expenditures. To save cash, bootstrappers work out of their homes, favor conference calls over travel, make do with used equipment, and avoid making long-term financial commitments to vendors and landlords until their businesses achieve several milestones of consistent revenue generation and profitability.

Most important, they know how much cash they have in the bank at all times and don’t sell products or services to customers who don’t pay their bills on time.

5. Only spend to create value. Most first-time business owners are uneasy about budgeting and making decisions about how to invest their limited cash resources to achieve business growth. Here’s how I make it easy for startup entrepreneurs in my coaching sessions.

Every potential business expense can be grouped into one of the following four categories:

- Expenses that directly build revenues in the form of bill-paying customers

- Expenses that build enduring assets, including intellectual property

- Expenses to maintain operations, including administrative overhead and taxes

- Expenses that represent nothing more than what I call “Drano dollars” (money that seemingly goes down the drain)

Successful business owners, at any stage of business development, persistently and perhaps stubbornly allocate more of their cash resources to the first two kinds of activities, which build “value-creating” revenues and assets. They invest cash only when they believe they can create even more cash for their company or themselves.

That’s what effective bootstrapping is all about — insisting that every dollar is allocated to its highest and best use. You can do it, too, provided you think before you spend.

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