Your Startup on a Shoestring

How much money do you really need to start your business? Probably not what you expect, and certainly less than before the Internet

You think you have it tough scraping together enough funding for your startup? Well, let me tell you about the old days, when funding a startup cost real money.

O.K., we didn’t have to wear second-hand clothes and skip meals. But when I became involved in helping a team of entrepreneurs launch a health-newsletter business in the mid 1980s, the expected expenses were daunting, especially for a enterprise that likely wouldn’t be specially attractive to venture capitalists.

The then-newly introduced Apple (AAPL) Macintosh computers, ideal for publishing, were $2,500 apiece, and we needed four. A laser printer (black and white was the only option available) was $5,000. There were photocopy and fax machines, which would be another few thousand dollars. A phone system was thousands more. Rent for a small office in Mansfield, Mass., would be $1,500 a month, or $18,000 annually.

The Tip-of-the-Expenses Iceberg

And then there were the marketing expenses, the main one being a direct mail campaign to obtain subscribers. We figured the cost for renting lists of potential subscribers, putting together a mailing package consisting of a pitch letter and glossy brochure, and postage at about $1 per package. Figuring a 1% response rate, it would cost us about $100,000 to send out enough pieces to reach our initial goal of 1,000 subscribers. Monthly expenses for printing and mailing the newsletter could be expected to be another $4,000, or about $50,000 annually.

So we were looking at something approaching $200,000—in the neighborhood of $400,000 in today’s dollars—and we hadn’t even begun accounting for salaries. Moreover, this was merely a test of the concept—even assuming we hit our 1% response rate, we wouldn’t know for sure if the venture was viable until a year later, when we saw what the renewal rate was. In any event, we’d have to invest possibly another $100,000 or more to go after additional subscribers.

Today, a similar consumer publishing venture could dispense with nearly all these expenses. The computers, copier, and fax, together with a color laser printer, could be had for $5,000 or less, total. No need for rent, since the team could work virtually for the first year. Forget, as well, about the phone system, since the team would communicate by e-mail and cell phone. There’d be no snail-mail direct-marketing approach, or printing expenses, since everything would be on the Internet.

Use Your Savings for Marketing

Now, this isn’t to say today’s publishing venture wouldn’t have any startup expenses. But contrary to what startup consultants may advise, the expenses for tangible things—equipment, offices, and brochures—are much lower today than they were 20 years ago or can be avoided altogether.

And even more significant, today’s startups can use the money they save on traditional fixed costs to deal with their key challenges: building and managing a web presence and marketing their products or services, online or offline.

The cost of handling these challenges can vary widely. Many startups reduce the expenses associated with building and maintaining their Web site by subcontracting out key tasks to low-wage countries such as India or the Philippines and by using free open-source software.

Money-Saving Techniques

On the marketing side, it’s possible to run up huge charges generating clicks via Google ads. One entrepreneur I know tells the story of how he neglected to cap his expenses and wound up with $4,500 of ad costs in a 36-hour period from click-throughs on his Google ads—costs that failed to generate any revenues.

Smart entrepreneurs shave such marketing costs by collecting e-mail addresses of prospects and using search engine optimization techniques to increase the rankings of their Web sites via links and traffic.

Here is how these techniques translate into an overall startup approach designed to take advantage of today’s low-startup-cost climate:

• Reduce fixed expenses by going virtual for as long as possible. To the extent the founding team members can work from home and use e-mail and cell phones to communicate, fixed expenses like office space and furniture can be minimized. At some point—usually when the team finds it must bring other people aboard to accommodate growth—an office will likely become necessary.

• Avoid hiring people—engage contractors. Even when it’s necessary to bring in additional help, using contractors can be cheaper than employees. Individual projects and per-hour expenses may be higher than employees, but using contractors enables startups to retain spending flexibility.

• Keep online development costs in check. Setting up a sophisticated Web site usually is more involved and takes more time than expected. It’s essential for startup companies to monitor progress and expenses closely, especially if offshore developers are involved. Divide such projects into segments and set a project cost for each segment, if at all possible.

• Put as much of your money into marketing as possible. Professional investors always like to see a company’s major investment going into sales, public relations, and promotion. Using Internet tools such as search engine advertising, entrepreneurs can quickly and easily test different messages and measure return on investment—say, by monitoring click through  against sales.

The main goal of any startup is to test assumptions and obtain feedback. It’s increasingly possible to carry out that goal at a lower cost than ever. The old days don’t look very romantic in today’s climate.

10 Ways to Grow Your Home Business

Home based business owners who fail to plan often fall victim to their own success. Either they burn out trying to juggle everything themselves or they spend so much time and money hiring people to help them that their profits go down the drain.Fortunately, there are some ways to take your home based business to new heights without sacrificing your business’s profitability or losing your peace of mind. Follow these 10 steps to grow your home based business into the personal and professional success it was meant to be:

1. Focus on a single product or service, and then market it, sell it, promote it, do everything you can to increase sales of that one product or service. While it’s tempting to swing for the fences and try to be all things to all people, it’s often less risky and more profitable to pick a product or two that you can execute really well and just try to get on base.

2. Expand your product line to offer complementary products or services. Once you’ve hit on a product or service that customers really like, don’t miss the opportunity to bring out related items to diversify your product line. Not only does that give your customers a wider selection, but it also makes your products more appealing to retailers who typically like to stock a line of products as opposed to a single item.

3. Find ways to increase sales to your existing customers. It’s a lot cheaper than finding new ones. Even if you can’t expand your product line, you can boost revenues by selling more of your existing product or service to the clients you already have. One easy way to do this is through volume discounts. Especially if your products cost little to produce, offering your customers the chance to buy, say, two T-shirts for the price of one lets you ring up additional sales without sacrificing much profit. Another common practice is to reward loyal customers by giving them a punch card that entitles them to a free product or service for every 10 items they buy. This technique is common at hair salons, car washes and arts-and-crafts stores, but home based businesses can use it, too.

4. Hire someone to help you out-an employee, a freelancer, an intern, an independent contractor, even your kids. Not only does this free up cash flow by adjusting your expenses to the level of work you bring in, but it also enables you to cultivate a large network of talented people you probably couldn’t afford to hire full time.

5. Create a Web site to advertise your company or sell products online. Thanks to the Internet, it’s no longer necessary to open a store to reach retail customers. For marketers of specialty products like rare books, collectibles and gourmet foods, a Web-based boutique lets you reach millions of shoppers around the world without paying for rent, utilities or garbage collection.

And while creating Web sites once required a big investment and the skills of an experienced Web designer or programmer, do-it-yourself Web sites are now available for less than $30 a month with no technical knowledge required. Typically, the companies that help you register your domain name (Web address) will provide online templates you can use to build your site, host your Web pages on their server and provide you with multiple e-mail addresses as well. E-commerce capabilities can often be had for an additional charge. You can also set up low-cost Web sites through Web hosting companies and search engines.

6. Join forces with another business to promote your company. Partnering with a company in a related industry is one of the cheapest and easiest forms of marketing that you can employ. If you make spa products, for example, you may be able to convince a local health club to carry them in its store by offering a discount to its members. Likewise, you can send a free, one-day health club pass to anybody who buys your lotions and scrubs.

7. Target other markets. If you sell to teens, start marketing to college students. If you sell to working moms, maybe your product will work for stay-at-home moms with a few modifications. Another strategy is to take a retail-oriented product or service and sell it wholesale. For example, a home based catering business that specializes in cakes, pies and other tasty desserts can contact local bakeries to sell its goods on a wholesale basis. While the price you get from the bakeries will be lower (because the bakeries need to mark it up to their customers to make a profit), you’ll sell more products and generate consistent cash flow that you can bank on.

8. Find new and different ways to market your business through e-mail newsletters or by doing guest-speaking gigs or by teaching a class. Marketing your home based business doesn’t need to involve spending big money on newspaper ads, Yellow Pages listings, or TV or radio spots. Grassroots marketing techniques cost far less and are often much more effective. Most chambers of commerce and community groups are more than happy to provide a forum to a local business owner who’s willing to share his expertise at no charge. Sending out a weekly newsletter is also a great way to get your name out in front of new and potential clients. Thanks to the Internet, you can send out your newsletter via e-mail using online templates and automated delivery systems.

9. Expand to another location. That could mean renting “virtual” office space in a business center or by sharing office space with another growing business. Brad Taylor, a CPA in Springfield, New Jersey, spends most of his time at home preparing tax returns, developing tax-planning strategies and revising his clients’ QuickBooks files. But when he needs to come to New York City for a meeting, he sometimes rents space at a Manhattan business center operated by HQ Global, a national provider of temporary office space.

For a monthly fee or a la cart, business centers like these offer everything from conference rooms and receptionist services to remote-access voicemail, high-speed Internet connectivity and tech support, offering home based business owners as much or as little outside office services as they need. Taylor pays just $10 an hour to use the space and is able to bill the cost to his client. “While I still want to run my business from home, this has allowed me to pursue new opportunities and network with other professionals,” Taylor says.

10. Think about turning your business into a franchise or business opportunity. While most homebased businesses remain small, yours may have the potential to hit the big time through franchising, licensing or wholesale distribution. The key question to ask yourself is if your business can be converted into a business format that somebody else could operate (a franchise) or if you have a standardized product or service that someone could resell multiple times (a business opportunity). While you may think that expanding your business requires raising capital, hiring employees, buying equipment and leasing office or warehouse space, it’s often more profitable-and less risky-to license your product to a big corporation with manufacturing capabilities and an existing sales force to do the work for you.