Start with Nothing
Posted by Pierre de la Fortune on August 06, 2015 @ 12:01 a.m.
Written by Emily Barker
That's how Gianforte launched his first company, software maker Brightwork Development Inc., in 1986. Eight years later he and his partners sold the business to McAfee Associates for more than $10 million -- a move that enabled Gianforte to retire to Bozeman, Mont., at age 33. After realizing that he couldn't spend the rest of his life fly-fishing, Gianforte started his second major venture, RightNow Technologies Inc. In almost five years, RightNow has grown from a spare bedroom in Gianforte's home to 230 employees and $30 million in sales. So it's understandable that he might think that he's onto something good here.
And it's also understandable that a whole new generation of entrepreneurs are suddenly hot on bootstrapping, too. There are only two ways to start a business, after all: with capital or without. And in these uncertain times, capital is scarce. But most would-be bootstrappers don't quite get it. They think the process means building desks out of doors and sawhorses. When Gianforte talks about bootstrapping -- which he loves to do -- he doesn't mean pinching pennies. Sure, he can trade tightwad stories with any bootstrapper. When RightNow was getting started, for instance, Gianforte couldn't afford to spend thousands of dollars on a phone system. So he got a separate line and an 800 number for each member of his tiny sales force. Employees couldn't transfer calls to one another, but each line cost just $30 a month.
To Gianforte, though, that kind of improvisation isn't really bootstrapping. Not the heart of it, anyway. Bootstrapping is both bigger and simpler than saving a dime whenever you can. If you boiled down his philosophy of bootstrapping, it would run something like this: lack of money, employees, equipment -- even lack of product -- is actually a huge advantage, because it forces the bootstrapper to concentrate on selling to bring cash into the business. There's an expression that Gianforte likes to quote: "In war you're either making bullets or shooting bullets." In other words, for the bootstrapper, business is all about just two things: making product and selling product. It's not hard to see which one is closer to Gianforte's heart. "Nothing Happens Until Someone Sells Something" reads the sign in his otherwise spartan office.
In other words, bootstrapping clears away the clutter and makes you focus single-mindedly on the customer, which is what any smart entrepreneur needs to do anyway. It compels you to be creative, and it's an acid test for figuring out whether you've got a real business or just a plausible-sounding business plan. But bootstrapping is a safety net, too, because if you wind up with no sales, no customers, and no business, well, at least all you've lost is time, not money. "You don't make any fatal mistakes" is how Gianforte puts it.
GREG GIANFORTE: "A lot of entrepreneurs think they need money ... when they actually haven't figured out the business equation."
What sets him apart from most bootstrappers is that he practices bootstrapping by choice. After he sold Brightwork, Gianforte says, he didn't have to work anymore. He moved to Bozeman in 1995 because he'd fallen in love with Montana on a junior-high-school backpacking trip, and because he thought it would be a good place to raise his kids. He settled his family in a rambling, cedar-shingled house just outside Bozeman, on a spread big enough that he gets a couple hundred pounds of buffalo meat every year in exchange for supplying a neighbor's herd with hay from his field. In Montana, Gianforte can camp in the summer, hunt in the fall, and ski in the winter.
But all of that recreation couldn't hold Gianforte's attention. Not that it wasn't fun; it just wasn't enough. Mountain-ringed Bozeman, population 27,500, home of Montana State University, was half college town, half cow town, a place that offered gorgeous scenery, an active outdoor lifestyle, and not much in the way of employment. Gianforte decided that his personal mission was to create 2,000 high-paying high-tech jobs in town. He had the talent for starting companies, he figured, so why not put it to use? First, he launched an incubator and started mentoring local entrepreneurs. He then started a venture of his own, an E-mail stock-quote service. But he got impatient. The companies that he was involved with were just too small. He began looking around for a new business to start.
Given his background and his software-industry connections, Gianforte probably could have raised angel money or venture capital. But the incubator experience had crystallized some ideas about company building that he had been turning over in his head ever since Brightwork. Hoping to spread the word, he created a PowerPoint presentation on bootstrapping and talked his ideas up to a couple of local business groups. "And then I used those lessons to start RightNow," he says.
Sales Before Product
Admittedly, when Gianforte talks about how he started RightNow, some of what he says sounds like nothing more than good entrepreneurship, period. For example, look at how he figured out what kind of business to start. Gianforte knew that he wanted to launch an Internet-software company -- not a hard call, given the business climate and his experience. In the early months of 1997 he surfed the Web, searching for a niche to focus on. No one seemed to be making a product that would help companies respond to E-mail from their customers, he noticed.
So far he was just identifying an opportunity, like any other smart entrepreneur. But here's where it gets interesting. Gianforte started trying to sell that nonexistent product. Armed with a data sheet outlining what such a product might do, Gianforte sat in a spare bedroom and cold-called customer-support managers at hundreds of companies. After talking them through the sheet, he told them that the product would be released in 90 days and asked whether they would use that type of software on their Web sites. If someone said no, he asked why. Sometimes the potential customer needed a feature that Gianforte hadn't thought of. If he thought that he could deliver it in 90 days, he added it to the data sheet.
Some might say that Gianforte was peddling vaporware -- the much-criticized practice of hyping the imminent release of new software that is far from ready. Gianforte disagrees. The key is not to promise anything that can't be delivered within the specified time frame. "You never want to lie to your customers," he says. What he did, he says, is "really sales as a method of market research. It allows you to determine very quickly, without much money, if you have a viable business idea."
The same approach will work for bootstrappers outside the software industry, Gianforte insists. Say a would-be entrepreneur wants to open a retail store, he offers. Don't sink capital into leasing space and ordering inventory. Instead, reach out to customers from day one. Advertise the kinds of products that you plan to offer, hand out flyers, put up a sign. Keep it cheap. If you get orders, that's when you rent the storefront.
Get Something Out the Door
Although rapid prototyping is common in the software industry, Gianforte took it to extremes, says David Bayless, a former venture capitalist in Bozeman who advised Gianforte during RightNow's start-up phase. "Watching the process and seeing it really work was pretty cool," Bayless says. "It struck me as unusual for someone with his technical background. They usually want to polish it and make it perfect before you get it out in front of the customer. He got it in front of people who could actually give him useful feedback."
After a couple of weeks of calling, Gianforte knew exactly what his potential customers wanted. That's when he got around to building the product. He spent two months writing a basic program that allowed a company to judge which information to publish on its Web site, based on E-mail queries that it received. "I don't even want to call it 1.0 -- it was the .8 release," says Gianforte. "But it was enough that people said they'd start using it."
But he still hadn't closed any sales. At first he gave the software away to anyone who would use it -- a move that might seem counterintuitive, given a bootstrapper's appetite for cash. But Gianforte was still working out of his house with no employees and no overhead. It was important to get the product out into customers' hands and hear their reaction, he says. "This is an iterative process," he says. "[The customer] says, 'Uh, that does what your data sheet said, but we really expected this.' Well, that's good input. You could say, 'Well, you signed up for that data sheet. You have to take that.' Wrong answer. You go and put those features in."
Gianforte began charging for RightNow software within three months of its release. He set the price point deliberately low -- offering customers a two-year license instead of a perpetual one -- to jump-start his sales. "He could have tried to sell it for $50,000, and it would have taken six to nine months to get his first sale," says Cindy Taylor, RightNow's former vice-president of field sales. Indeed, most of the other entrants into the Internet customer-relationship-management market have introduced more-expensive software, says senior analyst Charles Rider of Patricia Seybold Group Inc., in Boston. Priced at $5,000, with discounts of up to 50%, RightNow's software attracted a handful of paying customers by September 1997. That year the company's total revenues were a paltry $20,000. But by early 1998 all new customers were paying customers, and Gianforte was selling about $30,000 worth of product a month. "It wasn't until that point that I really concluded that there was a strong business there," he says.
Before that time, Gianforte had invested less than $5,000 of his own money in RightNow, which paid for a computer, a Web site, a phone line, and other office necessities. Now, after selling his share in another small software start-up, Gianforte was ready to put $50,000 of the proceeds into hiring his first employees -- and, more important, to devote himself full-time to the business.
Sell, Sell, Sell
Every business needs sales. But a bootstrapper has to be single-mindedly obsessed with sales. How else can you get the cash to keep the business afloat? For his part, Gianforte takes a near-mystical view of selling as a higher calling. He's a natural salesman, whose secret weapon is the sheer confidence and optimism that he exudes rather than backslapping bonhomie. "A lot of companies think sales is like a necessary evil," he says. "Sales is really the most noble part of the business because it's the part that brings the solution together with the customer's need."
And in RightNow's Montana setting, it made a lot of sense for Gianforte to focus on building a sales organization instead of trying to develop the most technologically sophisticated software package available. Thanks to the presence of Montana State University, Bozeman had more computer programmers than most towns in Montana did, but it was still a long way from being Silicon Valley. "He had the opportunity to grow quickly, but not if he had to put wave after wave of top-notch technical talent into the fray," says Bayless, who's done a study of the relationship between place and entrepreneurial success. (See " Know Your Place," in the August 2001 issue.) "Part of his strategy was an honest assessment of human resources in a small town in the middle of nowhere."
It's not surprising, then, that when Gianforte made his first three hires, in March 1998, he hired salespeople -- and only salespeople. Unlike so many entrepreneurs starting Internet companies at roughly the same time, Gianforte decided not to hire any marketing executives or to look for someone to forge strategic alliances. Not that those functions weren't important. They just weren't as important as making sales now. Gianforte relied on his wife, a former consultant, to handle accounting and operations. "She was my safety net," he says. "One of the challenges for an entrepreneur is, Can you really trust someone with the books? Someone writes some checks or approves some purchase orders that shouldn't have been approved, and then you're dead because you're out of money."
Gianforte couldn't afford to send his salespeople on sales calls. So he had them work the phones. He's firmly convinced that telesales is the better system. "It costs over $200 for a salesperson to do an on-site visit, on average, and it's highly inefficient," he says. "You can do two, maybe three customer visits a day. In telesales, you can visit 30 people a day."
That tactic turned RightNow into a high-pressure environment. There were high fives and parties at Gianforte's house if the salespeople met their monthly quotas, and there was glum tension if they didn't. Few of Gianforte's early hires had telesales experience. Andrea Smith, who joined RightNow as a salesperson in 1998, says, "I learned pretty quickly that I didn't know what I was doing." It took six painful months before she got the hang of selling over the phone.
The lack of marketing materials didn't help. The concept behind RightNow -- that companies could use software to help reduce E-mail inquiries -- was a new one to most potential customers. "We had no marketing or advertising at all," recalls Janice Taylor, one of the first salespeople that Gianforte hired. "We didn't have any hot-leads program. It was tough." Early on, Gianforte had a few brochures printed up for a trade show, but he didn't believe that sending literature was an effective way to sell. Once that first batch was gone, the sales force had nothing -- a big fat zero -- to send to interested prospects.
HIGHER CALLING: "Sales is really the most noble part of the business."
--Greg Gianforte On the other hand, Gianforte came up with an alternative to expensive marketing brochures -- a concept that remains a key part of RightNow's selling strategy. It's a demo Web site that copies the look and feel of a potential customer's Web site, with RightNow software loaded in. Over the phone, a salesperson walks the prospect through the site, showing how RightNow's software works.
Andrew Field, president of PrintingForLess.com, in Livingston, Mont., says he was bowled over when a RightNow salesperson called and showed him the software on his mock site. "It's the difference between seeing a car and taking it for a test drive," says Field.
Even better, the demos cost almost nothing to build. Students from Montana State University can turn out one demo in an hour for $8. That's just smart bootstrapping. Says Gianforte, "There's always a better way."
Gianforte also replaced marketing dollars with social capital. From his Brightwork experience, he knew a lot of technical writers and software reviewers. In late 1998 he hired a public-relations agency -- trading equity for a reduced retainer of about $4,000 a month, with the first two months free -- and spent a big chunk of his time doing PR. As company spokesman, Gianforte was RightNow's PR program. "I would talk to three to five editors a day, every day," he says.
All that penny-pinching wasn't just to be cheap, Gianforte insists. A big part of successful bootstrapping is knowing where to spend money. "We knew that if we could save a dollar, we could use it to hire more salespeople," he says. "What is the core job here? Two jobs: selling and building product. We were myopic about it. For the first year and a half, all we did was build product and sell product."
It'll Cost You
Building a product presents another problem for a bootstrapper. How will you pay for it? Funding the development process was simple enough in RightNow's early days, when Gianforte was writing all the software and taking no salary. But in August 1998, when the founder made his first technical hire (vice-president of product development Michael Myer), he was adding overhead. Sales hires bring in cash. Technical hires don't.
Normally, they don't, that is. But all along Gianforte had been listening hard to customer feedback and using it to refine his company's product. It wasn't a huge step to begin asking customers to pay for additional features that they requested. Getting customers to pay for improvements used to be common in the software industry, says analyst Rider of Patricia Seybold Group. But in the late 1990s, he says, when venture capital was flowing freely, the practice fell out of favor -- except among stalwart bootstrappers like Gianforte. Throughout 1999, 80% of RightNow's development was underwritten by customers, says Gianforte.
"I used to get on the phone with Greg and say, 'You're killing me. You're breaking my wallet!" says one of those customers, Rick Lowe, who was then vice-president of customer service at ClickRebates.com. On the other hand, Lowe says that he appreciated the attention that RightNow was paying to his company's needs. "Not many software companies do a good job with that," he says. "They always try to build something in a vacuum."
These days RightNow doesn't ask customers to pay development costs for new features, as a rule. "We reached a point where the product was mature enough," says Myer. But Gianforte still wants his top software developers to talk to at least five customers a week. "We say to the developers, 'Your job is to build a product that sales can sell. Figure it out."
Bootstrapping may be the best way to start a company, but is it the best way to continue to build one? Not always, says Gianforte. "There comes a point in a business where you start to understand the business equation," he explains. "You've got a product you know the customer is willing to pay for. You have a sales strategy that works. And the business is growing. That's all given. But you believe you could grow the business faster if you had more resources." Then it makes sense to look outside for funding.
But, he cautions, "it's a slippery slope. I think a lot of entrepreneurs think they need money to build the business faster when they actually haven't figured out the business equation yet."
By December 1999, Gianforte was confident enough about his business equation to raise $16 million through a private placement as a first step toward going public. The company filed for an initial public offering in 2000 and got as far as launching its road show, although Gianforte pulled back in the fall of 2000 after the IPO market cooled.
Why go after outside money? Larger competitors of RightNow -- like Kana Communications Inc., Servicesoft Inc., and E.piphany Inc. -- had emerged. Gianforte wanted to open sales offices elsewhere in the United States and overseas. "The window was open," he says. "We needed to jump through it." With the outside funding, RightNow has opened offices in Dallas, London, and Sydney, Australia. Without the money, says Gianforte, "we would have executed the same plan, but it would have been a little slower."
In its bootstrapping past, RightNow was housed first in Gianforte's home, then in a windowless room in the back of a real estate agency, and later in a former elementary school. Now it's based in a cluster of low-slung, spanking-new office buildings on a field near the university. Once Gianforte began to hire more experienced managers, he had to start thinking about the company's image. "When you're trying to recruit a senior product manager from Hewlett-Packard, he doesn't want to work in a garage," he says. Gianforte built the cluster in partnership with a local developer and leased space in it to RightNow. No reason for the company to sink a lot of cash into real estate, he says.
Today the software that RightNow sells offers far more features than the stripped-down version that Gianforte first designed, and a typical two-year license goes for $75,000, not $5,000. In addition, the company has a 12-person marketing department and a slew of glossy brochures that are aimed at developing and promoting RightNow's once-neglected brand. Still, "marketing is a lot more ROI driven than at any place I've ever worked," marketing director Dan Nichols says. Gianforte still deliberately avoids some popular marketing nostrums. The company shuns big trade shows, for instance. Not only are they too expensive, says Gianforte, but they're a terrible way to meet customers. He makes an exception for smaller, regional shows, where tables run about $1,500.
How do you keep acting like a bootstrapper when outside capital suddenly raises your company to a level of comparative affluence? You continue to think very, very hard about how your business allocates its resources. You spend money only to make money. "Our company is morphing into a more traditional corporation and leaving some of this stuff behind," says Gianforte. "We don't want to leave it all behind."
What of his goal of creating jobs? The average position at RightNow pays just over $50,000 a year. Not bad, considering that the median household income in Bozeman is $30,450. Still, of the 2,000 jobs that Gianforte wants to create, he still has a bit more than 1,600 to go. And a good chunk of RightNow's future growth will likely take place outside Bozeman. So the real test of Gianforte's bootstrapping ethos may be whether he can inspire entrepreneurs around him to create companies and jobs.
"Greg understood that it was important that there would be a business like RightNow Technologies, because people need to see it, touch it, before they can believe it can be done," says Bayless. "There was no company like RightNow here. Greg was out to make the statement 'Look, it can be done here."
Field, president of PrintingForLess.com, has heard Gianforte speak about bootstrapping. Field has come away with a sense of validation. "Greg has big-city, big-company experience, and for someone with that background to come in and say to you 'Bootstrapping is the way to go' is very encouraging," says Field. "I had a natural inclination that way, but I didn't know it was the best way."
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