November 13, 2009
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Small business finance expert Dileep Rao explains why some of the greatest companies never had a dime of investors’ money to get off the ground and grow -- and how hard work, integrity, creativity, and an open mind can make up the difference.
Depending on your point of view, this might be the worst time to start a small business. On the other hand, with creative business and financing strategies, it's possible to be successful without one dime from Wall Street or Silicon Valley. At least that's the viewpoint of Dileep Rao, a consultant and small business finance expert who teaches financing courses at the Carlson School of Management (University of Minnesota). To prove the fact that you don't need VC funds to be successful, in his forthcoming book, Bootstrap to Billions, Rao chronicled the stories of several Minnesota entrepreneurs who started with nothing to build successful companies such as Best Buy, Aveda, Digital River, United Health Group, and Medtronics. He calls the companies in his book a "third category" of business: not small business, and not built through VC financing.
What's so special about Minnesota in terms of business-building?
Minnesota has the highest per capita number of Fortune 500 companies in the country. I wanted to find out how it happened, and could it be replicated? I tried to find every Minnesotan entrepreneur who had built their company from scratch to $100 million in sales or larger. Only .07 percent of companies in this country have done this. I think a great deal of the reason behind this phenomenon in Minnesota is the quality of public education. People can come from any place in society and succeed here. None of the entrepreneurs I profiled went to private schools, and they all had had hunger.
Explain more what you mean about the "third category" of businesses and their emphasis on capital-efficient strategies?
One is Best Buy. Richard Schulze started the company (originally named Sound of Music) on his own, through re-mortgaging his house. He knew a lot about pricing, merchandising, and training people but he had very little outside financing. Later on, he went to his vendors and told them that he needed some inventory financing to grow from a small to big store concept, and they funded him.
Another guy whom I profiled started a business selling Macintosh products through the mail. His strategy was to set up operations next to his main vendor, a big manufacturer, and he was able to take orders every day and ship products out the same day, and his customers had to pay before he would ship. He made sure he always had enough cash to pay his vendors on time -- and that was something that I found in common among many of the companies in this book. This particular guy started his business on a $40,000 credit card loan, and ultimately grew to $40 million in sales annually. He later went on to found Digital River.
So is there a common thread here about smart financial strategies in today's world?
Yes, you don’t need VC and angel money to make it. It does involve hardship at the start in terms of the work involved and not making a lot of money. If you are willing to be more creative when you fund your business and pay vendors on time, you can grow. What these people did is to find ways to have someone other than a financier fund their growth, and when financiers don’t dictate how you grow or who controls your company, it’s a whole new ballgame. You are in charge and you can grow as fast as is prudent. Also, understand accounting. What I find often, when I work with entrepreneurs, is they say that they aren't numbers people. That's nuts. You have to know this stuff.
How realistic is it in today's economy, that a small company can bootstrap itself to millions, much less billions in sales?
That is the $64 million question. The reality is, if we [in the United States] don't try, someone else will. And the world is hungry. We have to start exporting again. But bootstrapping is painful, to get used to earning very little for a few years. Silicon Valley has done well because of some unique factors of that region, yet other places in the country have not been able to duplicate that. This book shows that there are other ways to succeed. For the rest of the country between Wall Street and Silicon Valley, the heartland, it's not just how to make money in 15 minutes. It takes patience.
Is there a "secret sauce" for bootstrapping to billions or is it a combination of luck, timing, and smart decisions?
Well, you need to understand the world around you, the key opportunities and where you can succeed. Also humility comes into play. The world controls itself, you don't control it. Also, there is no substitute for hard work. Finally what I found most interesting in these profiles was the commitment to integrity. These leaders needed to ensure that the people they worked with were honest. They laid out the ground rules and got a commitment from their people on the plan.
Note:
Bootstrap to Billions will be available by the end of 2009 at Dileep’s website.
He is also the author of the following small business finance books: Finance Any Business Intelligently(TM) and Handbook of Business Finance.
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ANDREW BIROL 2 years 6 months and 16 days ago
Profitable Growth happens when customers pay you more for your value than you paid to create it. In a credit-tight world, learning to make your customers pay for for what they buy from you along the way is critical to success. Dileep Rao has done the small business world a real service by debunking the VC myth. If more companies spent more time trying to sell real solutions to real customers with real money rather than raise money, they would create more profitable, organic growth. Small business credit and loans may not be abundant for a while, and writing investor plans to get cash is a real distraction from creating value that customersa will pay for quickly, with no strings attached.