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Making low-cost start-ups pay off.

When Sherrie Maurer made her own tomato-apple ketchup in her Vermont kitchen nine years ago, she gave it away as gifts. Then friends urged her to put it on the market.

Maurer was no stranger to the food trade, having worked as an inn manager and caterer, but she wasn't rolling in start-up capital, either. She managed to scrape together $6,500, mainly from her family. She called her product Beyond Ketchup, her company Jasmine & Bread, and spent the $6,500 carefully. The first order of labels alone took $2,000. Apples, spices, 2tons of tomatoes, containers and shipping cases took another chunk of cash. She rented a co-op production facility and hired workers from a nearby cannery. And she got a break when eight friends volunteered to help with the first production run in exchange for a lifetime supply of ketchup.

For two years, Maurer and her husband spentweekends driving Beyond Ketchup all over New England. "We'd look in the phone books for country stores or specialty-food stores," she recalls, "then go around offering to do demonstrations." When sales couldn't pay for the travel, they paid out-of-pocket.

All that work--and Jasmine & Bread grossed only $6,000 the first year. Then The New York Times featured the company in a story about a New York trade show. That led to more publicity, which Maurer used as entree into more markets, including mail order. "That story made me credible," Maurer says. "Before that I was just this person who showed up with her condiments. It made retailers much more willing to give my product a try. I used that article for a couple of years, sending out copies with the orders I sent out so [the retailers] could display it."

Today growing by between 20% and 30% a year, Jasmine & Bread has mail-order presence throughout the country, wholesale distribution everywhere east of the Mississippi and on the West Coast and a "spetty but increasing" presence in the Midwest and South. The nine-condiment line includes a tomato-pear-ginger salsa (Beyond Belief) and a mustard (Beyond Horseradish Mustard) the company's No. 1 seller. "We're still very small," Maurer says. But she considers last year's gross-- $268,0DO--satisfactory.

Like 75% of black entrepreneurs, Maurer started with a dream and less than $10,000. Sweat equity, not cash equity, tells' their start-up story. But Jasmine & Bread is just one of many successful black-owned companies that started with only $5,000 or so. As Sherrie Maurer and others have found, limited access to conventional business financing doesn't have to shatter the dream. Keeping The Dream Alive

The U.S. Small Business Administration (SBA)reports that fully 70% of all black-owned start-ups are funded from personal savings or by family and friends. Most start with less than $5,000 in working capital. For that reason, 76.1% of black-owned start-ups are service or retail operations, which tend to be more labor- than capital-intensive. The most recent (1987) Economic Censuses counted 209,547 black-owned service businesses, a full 49.4% of all black-owned firms. By contrast, only 24.6% of all small businesses are service companies.

The long-term profit potential in all service and retail firms is limited because the margin for error is small in thinly capitalized businesses. The SBA notes that 94% of black-owned firms are sole proprietorships, but these firms bring in only 51% of the $19.8 billion made by all black-owned businesses. A solid 39% ($7.72 billion)of the money that black-owned firms take in comes from the 3% of incorporated businesses that have a better survival rate than those that are not incorporated.

In fact, would-be entrepreneurs seeking low-cost business opportunities should remember the adage: Forewarned is forearmed. Don't let the appealing affordability of low-investment businesses blind you to the alarmingly high failure rates of such concerns. Last year, the SBA told Congress that between 1986 and 1988, 780,000 businesses with fewer than 20 employees were launched, and 704,000---about 90% of them--failed. During the same period, 197,000 firms with 500 or more employees were started, and 93,000, or only 47%, of these bit the dust. Meanwhile, the number of black-owned retail firms declined by 6.5% between 1982 and 1987.

Numbers like these would scare anybody, but black entrepreneurs are starting up new companies every day. Jerry Roebuck is founder of Black Expo USA, which promotes trade shows featuring black-owned businesses in major cities. "At anytime, 50% of the African-American businesses [exhibiting with us] start out as mom-and-pop type operations, doing under $1 million a year," Roebuck says. "And some go on to do great things."

Roebuck, who sponsored 12 Black Expos in 1992 and plans 14 for 1993, confirms that low-investment entrepreneurs tend to be concentrated in service-oriented businesses, often run from home, "where people can start to create something themselves--consumable food items, T-shirts, dolls, garments. It just amazes me to see the products people fashion out of their home or basement that need to be on store shelves."

Services to consumers or businesses are a logical option for entrepreneurs who can't afford retail inventory or massive machinery, but can travel to client locations or operate from a home office. For example, desktop publishing, medical transcription or professional billing are all services that can be provided using little more than a personal computer (which unlike other products, has dropped in price in recent years) and the right software. Personal fitness training, errand services, house-sitting, grocery shopping, sales of any kind--these are all businesses that require no special facilities, no inventory, little traditional advertising, few if any employees, and in most cases, less than $10,000 to start. "More than 50% of all service businesses," says Arnold S. Goldstein, consultant and author of Starting On A Shoestring: Building A Business Without A Bankroll (John Wiley & Sons Inc., New York),"offer services that only recently came into demand."

In the shakiest of economies, self-employment confers a sense of control over your own destiny. And America's uncertain employment picture--what with corporate downsizing on one hand and vanishing public-sector jobs on the other--is pushing more and more African-Americans toward self-employment. Between 1982 and 1987, the last years for which figures are available, the number of black-owned firms grew by nearly 38%, while the total number of U.S. businesses grew by just over 26%. "All of our members have about the same scenario, that they started with little or nothing," says Carl Dickerson, president of the Black Business Association of Los Angeles. "Some used credit cards to get started. But their real investment was their own energy."

Energy alone, of course, won't help you if you jump into the wrong kind of business. It takes research and planning to make a realistic match between the business you want to start and the amount of money you have available. Think ahead, not only about what your business is, does, and can bring to the market, but also about how it is likely to perform over the long haul. Even if you're just beginning to save money for your start-up, start thinking of yourself not just as a self-employed person but as a business owner. The difference in thinking can affect the way you make business decisions.

When money isn't readily available, every available dollar and every ounce of energy and determination have to count. "Nobody is going to knock on your door, lead you by the hand, and do it for you," says Goldstein. "Nobody is going to give you the push to get started today."

One of Sherrie Maurer's first stops was the SBA, which required her to go through a series of business seminars before it would consider her loan application. "They eventually decided that I didn't have a marketable product," she recalls. "So they didn't back me." The SBA banker took a second look when she raised $5,000 from her family. "He loaned me another $1,500, figuring that if the business failed I could pay it back." She repaid it within a year.

Getting Beyond Ketchup on store shelves was another hurdle. "In the beginning, we started trying to attract food distributors," Maurer says. "When they asked for incentives to sell my product, I said, 'You mean the fact that I have a good product is not incentive enough?' They said no. They ask for slotting fees [paid to wholesalers by manufacturers of new products], they ask for 100 free cases for promotion, they ask you to attend shows in their booth, at a cost to you. And when you're growing a small business, it's crazy to do that."

Maurer's response was to spend two years driving New England's specialty-food byways. She also credits Vermont's Department of Agriculture with sponsoring the New York trip that resulted in The New York Times coverage. (The department provides product testing and information to the state's cottage industries.)

Maurer got some special satisfaction in 1989, when the SBA gave her two awards, as Vermont's and New England's Minority Small Business Person of the Year.

Compensating For A Cash-Poor Position

"The thing that keeps most black people from taking the risk of a business," says black business advocate Dickerson, "is that normally they don't have enough money. They do have responsibilities. They can't make a commitment to the risk, and consequently rationalize to the point where they just don't do it." Those who have taken the risk, however, have found that business investment is often not so much a matter of how you spend, but how you structure your business and how you spend the money you have.

Most entrepreneurs agree that choosing the right kind of business was a big factor in their success. Successful business owners generally choose an industry they know something about. Chiquita Bell and Anita Stark chose temporary services. Bell, a legal secretary who saw well-paid temps coming and going at her Los Angeles law firm every day, had only$3,000 in the bank when she decided to start a business. But she knew everything about the clerical needs of attorneys, and she used that knowledge to focus her temporary-help service, Just Me Personnel, on those needs. Within a year, she had enough money to move out of a home office and serve her niche market from downtown.

Meanwhile, a few L.A. suburbs away, Stark, a 12- year veteran of GTE's purchasing department, knew just how much money GTEs penton outside vendors. She took out a $25,000 second mortgage to start Quality Personnel, and by the end of the first year had billed $163,000 for her light-industrial workers (e.g., general laborers, assembly line workers, packers, warehouse clerks). Eventually, she even got GTE as a client. Stark and Bell first connected through the California Association of Temporary Services; by the time they merged their niche-market firms in 1991, JM Temporary Services & Affiliates Inc. was supplying temps for both markets all over Southern California.

The less cash you have, the more you'll need industry knowledge. If you have the expertise, on the other hand, you'll be able to manage with less cash. As Goldstein puts it, "Match the business to yourself before you match it to the market. Remember, you want a business you can enjoy, manage and earn from."

The concept of image-consulting was just taking off in the mid-1980s when Toy Russell-Van Lierop went into the business. (An image consultant can pull down $1,500-$2,500 a day by telling clients how to walk, talk and dress with style.) A former model and national spokeswoman for Union 76, Chevrolet and Lincoln-Mercury, Russell-Van Lierop had a background in television makeup. "I had been an apprentice at ABC in the makeup area," she explains. "I had to learn lighting and camera techniques, and after I left ABC I got involved in makeup in the film industry."

Russell-Van Lierop decided to specialize in advising oncamera talent at local TV stations. A friend at ABC recommended her for her first consultation; word-of-mouth and Russell-Van Lierop's reputation did the rest. She knew she would not have to spend a lot of money developing the content of her service because she was expanding on what she had always done as a makeup artist. She wouldn't have to set up an office address because she would be consulting at client locations. But she did drop $2,000 on a top-of-the-line brochure that went to TV station managers around the country; it included endorsements from some of the famous people she had worked with as a makeup artist. Russell-Van Lierop says that her all-time favorites--Joanne Woodward, Paul Newman and Halle Berry--"have been extremely helpful. They have recommended clients, both individually and at stations."

Although Toy Russell Inc. grosses "into the six figures" these days, it wasn't all uphill. "It's extremely difficult to go into a service business," Russell says, "and a lot of times it could be discouraging. What l am selling is myself and my expertise. The single most important thing you need is perseverance."

There are many business options open to entrepreneurs. The personal computer, for example, has made it possible to run complex and highly professional information-age enterprises from a home-office PC: desktop publishing, computer-database research, medical transcription, bookkeeping or medical-dental billing. But each of these businesses has different staffing requirements, client expectations, billing practices and growth patterns. The time you take to understand them today ill help you make informed decisions on them tomorrow.

One research option is to exchange work for knowledge. "Find someone who is already doing the business and volunteer your services to them," Dickerson suggests. "If I wanted to go into the insurance business, I might want to work for an insurance broker, helping him get leads by phone." To some people, that kind of sweat equity may be a raw deal. But from a business-investment standpoint, it makes more sense to part with time than with cash.

If money is really tight, Dickerson advises, try to ease your way toward entrepreneurship. "Start part-time," he says, "creating a transition bridge, where you allocate some time to do what you want to do. Accumulate sick time, vacation time, a leave of absence and couple that with savings. And if you can, get into a low-cost housing situation where you don't have to worry about a lot of rent."

Consider Working From Home

The best way to not worry about business rent, of course, is to start a business from home. This is sometimes not just an economy measure, but a sound business decision. "Plenty of shoestring start-ups," Goldstein says, "are nothing more than cottage industries, with industrious entrepreneurs moonlighting at a kitchen table ortinkering in the basement. For some it's the best place to start."

Apparently, according to New York-based LINK Resources, about 10 million people who have established full-time self-employment at home agree. The Census Bureau reports that 54% of African-American entrepreneurs surveyed operated businesses from home. And according to Paul and Sarah Edwards, the authors of Working From Home (Jeremy P. Tucker Inc., Los Angeles), 600,000 full-time, home-based businesses were launched between 1990 and 1991, contributing to a 12% increase in the total number of home workers.

Goldstein goes solar asto say that spending money on a business address may actually be a bad financial move in the early phase of operation. "You may not need a physical plant to put yourself in business,"he says. "In fact, you may be better off without it, by buying or subcontracting what you plan to sell. Many start-ups look at their business idea as essentially a production activity. They overlook the common reality that it's more of a marketing activity, with production better left to someone else."

There are plenty of resources available to entrepreneurs who want to establish business operations at home. For example, for a $75 membership fee, the Darien, Conn.-based American Home Business Association offers such services as a professional advisory hotline, a comprehensive group insurance plan and a buying service that offers savings on office equipment and other products. (For tips on equipping your home-based business, see "Tech Tips For The Home Office," Tech Watch, January 1992). And books such as Home Business-Big Business: How To Launch Your Home Business and Make IrA Success by Mel Cook (Collier, Collier Books, New York), provide information on everything from choosing the right type of business to run from your home to legal advice for home-based entrepreneurs.

Russell-Van Lierop ran her practice from a home office for the first five years. Earlier this year, she leased a small office in Manhattan when she began to attract the corporate clients who now account for 25% of her business. What she did spend money on was an answering service. "I don't use a machine," she says. "In this business, it's important for callers to hear a human voice."

Jasmine & Bread started on a home-kitchen stove. Not long after the first production run of Beyond Ketchup, for which she rented canning facilities short-term, Maurer enlarged her kitchen and brought it up to restaurant code so she could do small production runs at home. She still tests recipes there, but she' recently took an important money-saving step by farming out production to what's known in the specialty-food trade as a co-packer. "You sign a contract with them, you give them your recipes, you oversee them," she says. "But they can produce larger quantities than I can, at a cheaper price. They are able to buy produce and glass at a cheaper rate."

Warren Dobson became an unemployment statistic in 1991 when the Chicago company he worked for--a supplier of McDonald's Happy Meal containers and toys--merged with another company and dumped staff. He'd saved some money and had thought about manufacturing Afrocentric drinkware. His first product was the Kente Kup, a plastic tumbler imprinted with the pattern of kente cloth, a hand-woven fabric from Ghana. But Dobson didn't go out and buy a factory or even rent one. He comparison-shopped among vendors he had worked with.

"I came up with artwork and went to cup suppliers, one a silk screener and one an offset printer," he says. "One would go as low as 500 units, and the other started production at 5,000. My initial investment was in low-volume production (1O[X) units per design), Which a manufacturer would normally use just to test a design. Basically l knew I would be selling at a less, but if the design was proven, I would go into production."

It was now October 1991--ordinarily too late to get in on Christmas-season sales. He had already spent about $5,000 to get his product to this point. But Dobson Products didn't lose a dime. When the Kente Kup's first production run sold out in three weeks, Dobson quickly carried the kente print to a coffee mug and sports squeeze bottle. Then he added paraphernalia of the eight major black fraternities and sororities, where he merged the African pattern with the organizations' own identification. He marketed this line to boutiques, black bookstores, gift shops and by taking booths at Jerry Roebuck's Black Expos and at fraternity conventions. "We sold over 10,000 units," he says of his first few months of operation.

His second bestseller--a Kwanzaa Kup, marketed to retailers through the Kwanzaa Expo in New York--came out in December 1991. Within three weeks, Dobson sold 7,500 units. Initially, he projected $60,000 in first-year sales but now believes he will reach $100,000 in sales by the end of 1992. He's still made no plans to buy or rent a factory, but he is now hiring four people to follow up on new-order inquiries.

The Challenge Of Success

Lack of cash can limit business potential, no doubt about it Roebuck cites a typical case. "Let's say a buyer from CVS [a national drugstore chain] wants to do a promotion with your product and wants 100,000 units to ship to all their stores. If it costs you a dollar to make your product, do you have $100,000 to take advantage of that national distribution? I've seen people not being in a position to take advantage of that offer. The problem is th at it happens so quickly they can't respond to it. You have to have some capital available."

Inability to respond to an opportunity is the worst problem a cash-poor business can have. One solution might be to take the purchase order to a bank and apply for a short-term commercial loan to finance production. Another potential solution, according to Goldstein, is to use a factoring company, "which will pay you upfront, while holding back a reserve for bad debts." Both of these options, of course, involve expensive fees and interest charges.

On the other hand, failing to anticipate the need to finance a big production run is really a failure of planning, not capital. For the shoestring entrepreneur, planning must control the pace and pattern of business development.

Planning is essential. "Realists," explains Goldstein, "understand and prepare for possible defeat. They objectively weigh the benefit/risk ratio of their deal and only move ahead when the possible gains outweigh what they stand to lose."

Jasmine & Bread's Maurer has an inexpensive suggestion for those who don't have much money in the bank: "When people say, 'If there's anything lcan do, let me know,' ask what they can do and if they're serious. If they aren't, the only thing they can say is no. There were times when I needed freezer space, and I was able to get it and a lot of professional services by trading or just by asking."

Too many entrepreneurs skip the all-important step of writing, following and regularly refocusing a good business plan, even though this practice has proven an essential function of business survival. Some business owners assume such plans are only for strategic planners at large corporations. Others believe that developing and following a written plan is too time-consuming or restrictive. Still others feel intimidated by the prospect of having to commit their ideas to paper.

However, if you're going to make a realistic case for how your business can deliver consistent profits, you have to be able to work out a plan, even if you must modify it once the business is up and running. It doesn't make sense to blow your limited, and thus valuable, start-up dollars before you've considered all of the variables on paper especially when you consider the high failure rate of low-investment businesses. Also, a well-considered professionally done business plan can be an important key to securing additional start-up or expansion capital for your business. Developing a plan need not be intimidating. Help can come in the form of books, computer software and videos such as The BLACK ENTERPRISE Video Guide to Starting A Business. (For more information on how to put together a solid business plan, see "A Good Plan is Key to Business Success," November 1991.)

Dickerson is a strong believer in formal planning, even (or especially) for low-investment businesses. "Hire a college student or a local consultant for three or four hours to be your sounding board," he says. "Go through the ABCs of what you are doing so that you don't go out and make mistakes that have already been made by other people. Then the next thing is to develop a real, written business plan. Very important--it must be written. The process of doing a written business plan is a second analysis."

Fortunately, a lot of analytical expertise is available, especially at Small Business Development Centers (often situated on college campuses). "Forget high-priced management consulting firms like Booz, Allen & Hamilton or Arthur D. Little," Goldstein says. "With a phone call you can have top-notch MBA students anxious to burn the midnight oil guiding your business."

Do-It-Yourself Success

One tried-and-true method of saving business capital is to personally handle some tasks usually given over to CPAs or lawyers. "Federal and state agencies," says Arnold Goldstein, "live in a world of forms. You'll need forms for everything from obtaining a tax number to registering your business name. But you don't need your lawyer to obtain and fill out these simple forms."

People who have had to do this because they couldn't afford to hire somebody to do it for them have been surprised--and pleased--to find they were up to the challenge. Warren Dobson trademarked the Kente Kup and the Kwanzaa Kup himself, just by wading through standard forms provided by the U.S. Patent and Trademark Office. Maurer incorporated her business herself. "When I started as sole proprietor, I was told I needed to incorporate to protect personal from business assets. But you can do it yourself for $35 to $50 [in Vermont; fees vary from state to state]. When you start with no money, that's the only way you can do it."

It's sometimes hard to see the upside potential of a business idea that's supported by energy, sweat equity, the kindness of family and friends-- and no money.. But others see business ownership as more than a path to financial security. As Carl Dickerson puts it, "The important thing for black people especially to understand is that in the capitalist system, an entrepreneur is the top rung of the ladder. All other things in society are designed to support and encourage the efforts of people who aspire to be entrepreneurs. They are the people that make the payroll."

FOR MORE INFORMATION

* Starting on a Shoestring: Building a Business Without a Bankroll by Arnold S. Goldstein, John Wiley & Sons, 1991.

* Home Business-Big Business: How to Launch Your Home Business and Make It A Success by Mel Cook, Collier Books, 1992.

* Small Business Administration. The best way to learn about SBA resources is the Answer Desk--800-U-ASK-SBA (touch-tone). It will direct you to a whole range of publications and programs that can help you save money as you build your business. Of particular interest:

Small Business Development Centers (SBDCs). Located at colleges and universities, SBDCs provide free or low-cost consulting services, including business-plan development and market research, to aspiring entrepreneurs. The SBA's Office of Advocacy publishes States and Small Business: A Directory of Programs and Activities. Published every two years, this directory contains a complete list of all SBDCs, as well as a glossary of the standard terms of business development. If you're in a town that has a college but no SBDC, you still may be able to obtain lowcost or no-cost consulting assistance by asking for help from the business department. Call 800-827-5722

Minority Business Development Agency, Department of Commerce, 14th & Constitution NW, Washington, DC 20230; 202-377-1936.

Ask about the two-volume directory, Minority Small Business and Capital Ownership Development Program. First published in 1990, it includes a state-by-state listing of Minority Business Development and Financing Authorities, as well as sample reports and forms used by program participants.

* U.S. Patent and Trademark Office, Department of Commerce, Washington, DC 20231; 703-557-3071. This agency will send you a basic package of information on what is involved in getting a patent or trademark. If you are developing an idea and want to protect your ownership rights before putting the product on the market, request information about the Patent Office's Document Disclosure Program.

* Hankamer School of Business, Center for Entrepreneurship, Baylor University, P.O. Box 98011, Waco, TX 76798-8011;817-755-2265. If you have invented a product or are developing a product idea, the Innovation Evaluation Program provides a preliminary screen of ideas and products. Also available: more formal reports analyzing the market for an invention.

* Black Business Association of Los Angeles, 3550 Wilshire Blvd., Suite 816, Los Angeles, CA 90010; 213-292-0271. This advocacy organization for black economic development, which expects to 90 national in 1993, sponsors contract-procurement meetings, seminars, trade missions and networking events.

* National Association of Black Women Entrepreneurs, P.O. Box 1375, Detroit, MI 48231; 313-341-7400. The first national organization addressing specific needs of entrepreneurial black women, NABWE has a growing international roster of some 5,000 members, who receive substantial discounts on programs, products, business services.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
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Title Annotation:B.E. Special Report on Small Business; includes a list of books and other resources for small businesses
Author:Brown, Caryne
Publication:Black Enterprise
Article Type:Cover Story
Date:Nov 1, 1992
Words:4678
Previous Article:Wanted: an agenda for small business.
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