Read these tips on how to build a business without going into debt from someone who has done it.
My job started as a hobby. I was working full time, but on the side, I started investing in real estate. My frustration at the lack of software to help me manage my properties turned into a side project: developing cool, free, easy-to-use software for landlords. Fairly quickly, my "clients" were asking for more features than I was offering for free and we grew.
As I continued to develop features, I figured I'd see how charging for the advanced options would be received by my current client base. I was met with positive feedback and (gasp!) people willing to pay for a subscription-based software. With the additional revenue stream from monthly subscriptions, I was able to pay my first employees, and Rentec Direct was born.
From the first landlords I provided the software to for free more than 10 years ago, my company has grown to serve over 14,000 landlords across the United States, helping them manage approximately 400,000 properties. How did we experience this kind of growth with absolutely no debt?
Many of us remember the Silicon Valley days of the '90s when software startups were being funded by venture capitalists and investors, with huge hiring sprees, lavish parties and state-of-the-art office buildings. This dot.com bubble burst rather spectacularly which, ostensibly, should have left us with a more cautious startup environment.
Yet, even in today's marketplace, if you visit the South Bay, you'll inevitably see CEOs and senior management of unprofitable startups driving around in Maseratis and Lamborghinis – all paid for with a "round of funding" bonus. This is not a recipe for success. I have been approached multiple times by venture capitalists. I have turned them down countless times. I’m not saying that taking outside investment is a recipe for failure; for me, avoiding this kind of debt – along with other smart practices – has led to a successful business model and a closer focus on our clients' needs rather than our investors' needs.
Here are some tips for those wanting to grow their businesses debt free:
- Reinvest for the long-term. Ideally, you want to invest any money made back into the business and get it to a profitable level before you ever give yourself a paycheck. I invested in automation and technology upfront because my goal was to create a platform that would run on its own (after all, my plan was to never leave my day job). This resulted in a model that, for Rentec, was profitable and never put us in the red.
- Spend only what your business makes. Because I set up the automation functionality from the beginning, our income has always exceeded our expenses. We've never once had to borrow to pay for technology, development or personnel. For every company, this light-bulb moment will be different. But setting up the infrastructure that will encourage positive cash flow from the outset will keep debt out of the picture. Making a profit or getting outside funding and then living lavishly is not a good choice for successful startups.
- Expect the worst. I know it sounds depressing, but it works. Count on the worst-case scenario to happen every time. If your team tells you that you'll have 50,000 new clients in three years, count on those projections being wildly wrong. If you end up opting for funding or a loan, do it on the basis that you'll achieve 25 percent of those expectations. If you exceed them, great, but if you don't, at least you aren't underachieving and thereby severely disappointing your investors (or yourself).
- Stability over publicity. Ask yourself if you are more interested in providing a stable lifestyle for your family and the families of your employees, or are you more interested in seeing yourself on the cover of Forbes? The former is a more modest approach that can be obtained by bootstrapping your company and is more likely to provide long-term stability for your family and employees. If you want fast fame, your only option might be to consider outside investment so you can grow faster at the risk of a less stable long-term business.
The bootstrap business model of growing a company without outside funding is not a new concept, but it is one that is often overlooked when innovators see dollar signs and growth potential from multimillion-dollar start-up capital. If you scale your expectations and business model to grow with your revenue, you increase your chances of creating a debt-free company.