Just a few years ago, getting an e-business off the ground was as easy as drawing up a business plan and finding the venture capital to fund it. Those days, to put it mildly, are over.
But this does not mean businesses that rely on the Web are no longer sprouting. Some are funded with personal savings, cash infusions from colleges or loans from a local business association. Others are built on sweat equity alone.
With the cost of Web-enabling technology now within reach of even the smallest startups, e-businesses are springing up every day. While most are not destined to be the next eBay, many are gaining traction without Super Bowl advertising or CEOs who earn million-dollar bonuses.
Money Changes Everything
Bob Mazur, a recent graduate of the University of Michigan’s MBA program, said state-backed programs can offer more than seed money. Mazur, who won US$10,000 from the university in a business plan competition, used his prize to start producing an item he now sells mainly online, the Purrfect Opener.
“What the competition really gave me was the additional confidence … that it would actually sell,” Mazur told the E-Commerce Times, referring to the multipurpose home tool he invented. “It told me people thought it was a good idea.”
Mazur also has embraced a common suggestion of startup experts by taking advantage of free publicity whenever possible. Stories in The Wall Street Journal and the Detroit News helped boost sales, but his Web site was bombarded with traffic after his product was mentioned in a newsletter sent to University of Michigan alumni.
“Other than the competition, I’m self-funded,” said Mazur, who recently began hiring other employees to help him operate the business. “So I really don’t have a large marketing budget.”
Hold the Bells and Whistles
Paul Purdue, who founded iFulfill.com five years ago, still has the first fax machine his company bought. It cost $50 and used thermal paper. He could have chosen a higher-end model, but bootstrapping was his preferred approach. He extended that philosophy to his company’s “headquarters,” eventually moving his two children into a single bedroom to make room for merchandise from the orders his firm fills for other e-commerce players.
The company began with a $100 deposit Purdue made on behalf of the company and since then has been funded largely with personal investment. This debt, which the firm already has started to work off, makes a venture or angel funding round unlikely, but Purdue said he prefers not to take on such an entanglement now anyway. Instead, he wants to focus on growing the business.
iFulfill.com ships about 800 packages per day, according to Purdue, and hopes to reach 1,000 daily by midsummer and 5,000 by the end of next year. “We still operate on the bootstrap principle,” he told the E-Commerce Times.
Word of Big Mouth
Indeed, in today’s down economy, entrepreneurs should steer clear of “big ideas” with long-range payoffs, according to Shane Jackson, president of NextStart Capital, a Web business incubator in Atlanta. “Focus on areas of the market that can generate immediate success,” he told the E-Commerce Times.
Jackson added that smart companies do not go it alone. Instead, he recommends finding other startups with which to share common resources, such as office space and back-office help.
“Remember, some of the best companies are founded during economic depressions,” he said. “That’s when people are conservative and focusing on the fundamentals. The companies that ‘make it’ now have a strong business model that will endure.”
Thinking Big, Spending Small
Steve Latham has seen both sides of the startup coin. As a vice president with PentaSafe Security Technologies, he helped raise $45 million in venture capital. PentaSafe was recently bought by NetIQ for $255 million.
Now, however, even smaller “angel” investors are harder to find, according to Latham. “Most have mentally checked out of the game” due to substantial losses, he said. “They are much more cautious now and will be until the momentum returns and they feel it’s safe to get back in.”
Latham funded his new company, Spur Solutions, which helps companies leverage the Web’s benefits, on his own and said he has found several ways to avoid the need for overhead. He claims that even though eight investors have expressed interest in funding Spar, he wants to wait.
“Regardless of how much we raise, we will be very cost-conscious, with a focus on getting to break-even cash flow as soon as possible,” Latham told the E-Commerce Times. “You have to look at any capital you raise as the oxygen for your business, and as any diver will tell you, you always want to have plenty on hand. So you need to make it last as long as you can.”
Will Work for Equity
Most startups now realize that means keeping the budget lean. Instead of pursuing office space, Latham has set up a home office, using DSL and a wireless network to connect his fellow workers, some of whom have agreed to help out in exchange for a chance to be on board when the company takes off. He has even cut deals with lawyers and accountants to exchange a piece of the future firm for reduced expenses.
“This may not have been possible in the late 1990s when the battle for talent was raging, but there are now a lot of good people on the street looking for opportunities to create some value for themselves while they are looking for income opportunities,” Latham said.
Spar also is avoiding long-distance travel by targeting local companies. Latham admits the largest expense he has so far is the salary he could be earning by working at an established firm.
After the Thaw
Will the new generation of startups, nurtured in a far harsher climate than their boom-era brethren, succeed? The answer may be a surprisingly resounding yes. Although the atmosphere for new businesses is unquestionably chilly right now, those firms that can adapt and survive could emerge from this Ice Age poised to thrive as the business environment becomes more fertile.
Who knows? Some might even evolve into the next kings of the jungle.