No Money, No Problem:
Eleven Tips for a Start-up
Business with Very Little Cash
(and a Great Idea)
Many entrepreneurs kick off their ventures on a budget so lean it’s beyond
shoestring; it’s dental floss! That’s especially true in an era where credit is almost
impossible to come by. Michael Houlihan, one of the founders of Barefoot Wine,
explains how to get the biggest possible bang out of very few start-up bucks.
You have a new start-up and you couldn’t be more excited. You know you’ve got a winning idea and you’re certain customers will love it. There’s just one problem, and it’s a doozie: lack of funding. Yes, even in the best of times it can be hard for cash-strapped entrepreneurs to pay for what they need. But now, with a sluggish economy and tough restrictions on who can get credit, your frustration is threatening to overwhelm your passion. More and more you’re starting to wonder, Should I just cut my losses and throw in the towel now?
Not so fast, says Michael Houlihan. While you do need some money to get started, you can seriously reduce the amount if you take advantage of some key bootstrapping strategies. It was the use of these very strategies that enabled him and his business partner, Bonnie Harvey, to found and grow Barefoot Cellars, the company that transformed the image of American wine from staid and unimaginative to fun, lighthearted, and hip.
“Trust me, I know what it’s like to try to start a business when you’re basically broke,” says Houlihan, coauthor along with Harvey of The Barefoot Spirit: How Hardship, Hustle, and Heart Built a Bestselling Wine (coming in February 2013 from Evolve Publishing, www.thebarefootspirit.com). “Bonnie and I were originally so strapped for cash that when we began making our wine in the mid-’80s, our administrative office was the laundry room of a rented farmhouse in Sonoma County, California. But despite our humble surroundings and shallow bank account, we were determined to find a way to make our dream a reality.”
Over the next two decades, Houlihan and Harvey learned how much they didn’t know about wine – making it, bottling it, selling it, marketing it, and competing against other labels – and Barefoot Cellars came close to producing its last bottle many times during those years.
“Even if you’re very familiar with your industry, you face an uphill battle when you start a company,” reflects Houlihan. “But ultimately, being undercapitalized was a great thing for Barefoot. It forced us to think creatively and to be resourceful every step of the way. In order to survive, Bonnie and I had to develop processes and procedures that worked; that succeeded solely on their own merits – not because we were constantly throwing money at every problem that cropped up.”
Barefoot Cellars turned out to be a big success and it was sold to E&J Gallo in 2005. Now, Houlihan is passionate about sharing with other entrepreneurs what he and Harvey learned the hard way.
Read on to learn about eleven cost-saving measures that helped Barefoot Wine survive and grow in its laundry room days, and that might just be lifesavers for your start-up, too:
Start in the garage. Hey, this strategy has worked for many aspiring bands (at least until Mom cut the electricity and silenced the electric guitar), and it can help your start-up to survive, too. Unless your company needs to operate in a specific type of space, wait until you have gained more momentum to start writing rent checks. Whether it’s an attic, a garage, a spare bedroom, or even the kitchen table, go anywhere that won’t make a dent in your bank account.
“As I said earlier, Barefoot’s first office was a laundry room,” reminds Houlihan. “It wasn’t glamorous. It certainly didn’t scream, ‘The people who work here are a force to be reckoned with!’ But it held our files and a desk – which, by the way, was an old door laid on top of a couple of old sawhorses. And most importantly, it allowed us to get the job done without spending any extra money.”
Get your family to help. The same people who cheered for you at Little League games and came to your annual piano recitals when you were a kid haven’t changed the way they feel about you. As long as you are humble and appreciative, you might find that they would like nothing more than to help your start-up succeed. So even if you have to swallow some pride in order to admit that you aren’t Super Businessperson and can’t do it all by yourself, ask family members to stuff envelopes, put together email lists, file paperwork, catalog inventory, and more.
“Retired grandmas, aunts, and uncles would love to make a difference in your life, and they’ll probably be thrilled to do something new and help the family business get started,” confirms Houlihan. “Remember, each relative who offers to help out takes the place of an employee you’d otherwise have to pay. And who knows, they may do a lot more for your start-up than just add manpower.
“Family members can also provide objective opinions and commonsense insight,” he adds. “In our case, Bonnie’s mom came up with the term ‘Barefoot Bubbly’ for our champagne – and it was a huge hit.”
Assume someone else’s excess inventory. Who says you have to start from scratch when it comes to producing your product? If it’s feasible in your industry and for your particular product, try to acquire another company’s unsold merchandise. If you can repurpose it, improve it, or otherwise incorporate it into your product, you’ve just saved yourself time, effort, manpower, and money.
“At Barefoot, we bought bulk wine in tanks, juice from grapes before it was fermented, and grapes themselves,” explains Houlihan. “We would do whatever was needed to make each batch into a wine that fit the Barefoot specifications. Sometimes, we would even contract with other wineries to make wine to our specs! Since we did not rely on owning and maintaining our own vineyards, we saved a ton of money, which is one reason that Barefoot became known as an affordable, yet quality, wine.
“If you go this route, just be sure that you never, ever compromise on quality when working with someone else’s inventory,” he adds.
Outsource everything except quality. Yes, you’re passionate about your business, and it’s natural for you to want to control and oversee every aspect of it from day one. But look at it this way: Until your financial balance sheet is more stable, what little money you have will be best spent on marketing your product so that you can make money, develop a customer base, and build momentum.
Then you can start funding a production facility if you so desire. Just remember that oversight is critical – anything you outsource will ultimately bear your company’s name, so never compromise on quality.
“With outsourcing, you usually pay only when the product is produced – and produced to your quality specs,” confirms Houlihan. “Remember our laundry room? Well, it was only an office – a command center, if you will. Bonnie and I outsourced wine production, bottling, and manufacturing the logo that went on the bottles. If we’d had to pay for all of that space, equipment, and manpower up-front, we would never have gotten Barefoot off the ground.”
Use “worthy cause marketing” to advertise your product or service. No matter how unique or useful or amazing your product is, your company will never succeed unless potential customers know you exist. In other words, you need to advertise. This, says Houlihan, is one area in which he and Harvey “stumbled” into a stroke of genius. In a nutshell, since Barefoot didn’t have the budget for traditional marketing, they spread the word about their wines by partnering with nonprofit organizations (NPOs).
“Specifically, we sought out organizations that believed in causes close to our own hearts – environmentalism, civil rights, education, the arts, and more,” explains Houlihan. “In this way, we gained access to huge numbers of potential customers and gave them a ‘social reason’ to buy Barefoot wine.
“When Barefoot Wine was starting out, Bonnie and I donated wine and manpower at our partner NPOs’ events,” he recalls. “We were able to help the NPOs, talk up our product, and conduct market research by talking to attendees.
We also recognized the NPOs on our website and publications, and vice versa. It was very much a grassroots effort, and because we worked hard, had fun, and believed in what we were doing, it paid off for us and our partner NPOs.
“Consider adopting this strategy for yourself,” he suggests. “Start by seeking out NPOs – small, local ones are best – that resonate with you and your product.”
Trade the goods and services you have for goods and services you need. If you think that bartering is a thing of the past, think again! When you look in the right places, you’ll find that there are still many entrepreneurs and companies that are willing to accept goods and/or services in lieu of a cash payment. Many start-ups besides yours, especially in their early days, will actually prefer this option to spending money, just the way you do.
“Find other start-ups that have what you need and need what you have,” recommends Houlihan. “Specifically, a good place to start might be any suppliers that are also start-ups. They are cash-strapped like you and probably need to spend money they don’t have. Find out what they need and see if it’s something you can provide. Perhaps your product is something their supplier needs.
“If your own inquiries don’t yield any results, there are many barter companies that specialize in these kind of trades,” he adds. “The main thing is to remember that your product can be valuable to someone who is willing to trade to get it. Just be sure that any trade you make is legal, and realize that there can be tax consequences.”
Forge strategic growth alliances with suppliers. This one comes down to plain old common sense: There are no drawbacks and many advantages to having a good relationship with your suppliers. Remember, as your company grows, you’ll become a bigger and bigger customer, which in turn will help your supplier to succeed.
“It never hurts to remind your suppliers of this fact,” points out Houlihan. “And when you’re on good footing with them, you’ll find that they’re willing to help you by providing special discounts and extending your credit because they like the way you pay your bills. Barefoot’s relationship with our bottle supplier in the early days stands out to me in particular. They extended highly unbank-like credit extensions to us many times. I explained that I could either pay what we owed now and not have any money left over to grow, or I could wait to pay and continue to grow. The glass company recognized that everyone would benefit more in the long term if Barefoot was allowed to grow now, and they always extended the credit we needed.
“One last thing: Make sure to never give your suppliers a reason to doubt your goodwill or integrity,” he adds. “Call them as soon as you know you will be unable to pay on time, and give them a workable payment plan. They have bills to pay too and will appreciate a timely heads up. As a matter of fact, that’s exactly the kind of customer they want long term.”
Give discounts for cash and large volume purchases. This strategy, says Houlihan, is another win-win proposition. Start by offering retailers a discount if they’ll pay cash for your product, or if they purchase a large quantity. Right off the bat, they can chalk up a win because they’ve saved money, and you can too because you’re ahead of your bills.
“This strategy continues to pay off over time, too,” promises Houlihan. “Say a buyer has just received a large shipment of your product. Chances are, he or she will want to put them on special and advertise them in order to sell them faster. After all, until the products are sold, they’re just taking up valuable warehouse space. It’s easy to see how this benefits both parties: Your product becomes more visible and (hopefully) draws in new repeat customers, and the retailer makes money from sales. Now that you and the customer are smiling, you can start the process over again.”
Sell your product overseas. “Going international” with your product is another good way to make cold, hard cash that you can then reinvest into your business. Giving credit to overseas buyers is so risky due to legal challenges, so most international transactions are cash sales based on a signed ocean-going bill of lading through a letter of credit. It’s kind of like an escrow account where you get paid when the buyer takes possession.
“Admittedly, this strategy will take a significant amount of research and preparation up-front,” says Houlihan. “But if you determine that selling your product overseas is a viable option, your work can pay off big time. Remember, the trick to juggling payables and receivables is timing. If you have negotiated longer terms with your suppliers, you can actually get paid through international sales before you have to pay your own bills. And if you can negotiate it, you can then pay the supplier earlier for a discount.”
Produce just-in-time inventory. Just-in-time inventory is (as the name suggests) a product that is produced just in time for the sale rather than one that is produced ahead of time and stored in a warehouse. The advantages of this strategy are obvious. First, you don’t have to spend as much money up-front creating a product stockpile. Second, if you play your cards right, you won’t have to spend money renting or buying storage space.
“Third, if you are able to get a purchase order from your customers up-front, you can manufacture only the amount of product that will be sold, thus keeping you from wasting money on excess production,” adds Houlihan. “If an up-front purchase order isn’t practical, operate with the minimum inventory you need to satisfy your customers, assuming a reasonable growth factor that you reassess every month.
“At Barefoot, we bottled our wine just before it was shipped so that we didn’t have numerous cases waiting for orders and racking up storage costs,” he explains. “By the time the wine was bottled, we knew it would be paid for and shipped quickly.”
Ask a lot of questions. When you’re starting a business with a tight budget, you literally can’t afford to make mistakes – and that means there’s no such thing as a dumb question. Before making any kind of commitment that will cost you money, ask lots of questions (and then ask some more) ahead of time until you’re sure you’re moving in the right direction. You’ll save money because you aren’t guessing or making incorrect assumptions. For instance, Houlihan and Harvey asked many questions so basic that many in the industry had stopped thinking about them: Which demographic buys the most wine? How do you sell it? How does this work?
The answers allowed them to get a fuller picture of the wine industry than many longtime professionals had, explains Houlihan. He and Harvey learned that it would be smart to aim for supermarket customers who wanted a solid, reliable wine, but who were put off by fancy labels and French terminology.
“We asked questions on a more granular level too,” he says. “I’ll never forget asking one supermarket chain’s gruff wine buyer what our logo should look like. He told me, ‘Don’t make it a hill or a leap or a run or a valley or a creek…Don’t put a flower on it. And for crissakes, don’t make it a chateau. Make the logo the same as the name…And whatever you do, put it in plain English…And, Houlihan, make it visible from four feet away. [The shopper] has to be able to see it when she’s pushing her cart down the aisle. Now get outta here. I got work to do.’
“Turns out, that advice was solid gold, and I didn’t have to pay a dime for it,” adds Houlihan. “All I had to do was ask a question.”
“Ultimately, launching and growing a successful business isn’t so much about how much money you have as it is about identifying the resources you have and using them as effectively as possible,” concludes Houlihan. “And once you do build up momentum, the cost-saving measures and innovations that helped you to survive in the early days will help your company to continue to operate as efficiently and effectively as possible.”
About the Authors:
Michael Houlihan and Bonnie Harvey, authors of The Barefoot Spirit: How Hardship, Hustle, and Heart Built a Bestselling Wine, started the Barefoot Wine brand in their laundry room in 1986, made it a nationwide bestseller, and successfully sold the brand to E&J Gallo in 2005. Starting with virtually no money and no wine industry experience, they employed innovative ideas to overcome obstacles and create new markets.
They were pioneers in what they termed “worthy cause marketing” and performance-based compensation. They held a comprehensive view of customer service, resulting in the National Hot Brand Award for outstanding sales growth in 2003 and 2004.
They now share their experience and innovative approach to business as consultants, authors, speakers, mentors, and workshop leaders. Their book, The Barefoot Spirit, chronicles the history and lessons learned building the popular Barefoot Wine brand.
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