Success on a Shoestring

Guide to E-Commerce Technology

The founders of GreenTree.com Inc. were still hashing out their business plan over a kitchen table when they hired a content editor for the online wellness center and vitamin superstore they envisioned. The work space they assigned the new staffer? A roommate’s bedroom. “We spent several months with five of us working out of my apartment,” says GreenTree co-founder Eric Budin. “That’s not the ideal situation.”

But rather than spend money renting office space, Budin and his partner, co-founder and CEO Donald Kendall Jr., used part of the $52,000 they had pooled to start the company to hire people to get the Web store up and running. “We could forgo salary ourselves, but I wanted to have enough money to pay employees for three or four months,” Budin says.

His strategy worked. The company used those early days to complete a pitch document for potential investors, line up editorial content for the site and court a strong advisory board. Once those items were in place, GreenTree won a loan to build its Web site, attracted investors and moved into a corporate office in San Francisco. Revenues have since topped $100,000 a month.

While it makes an interesting story, the Internet is full of people who invested a little bit of money and a lot of sweat equity, and today are proprietors of successful Web stores. These online entrepreneurs have taken a variety of approaches to launching stores on a shoestring budget. Joe Cataudella, for one, created a thriving online video game shop with $12,000, some of which went to renting space in New York.

Yet people who succeed find common ground as they plug along. Many of the experiences they share are not much different from what they would experience operating a store in the real world. It takes hard work, creative dealmaking, the ability to provide customers excellent service, and help from people who are willing to buy into your big idea. “When you start your own business you have to find people who will work with you and grow with you,” says Peter Coomaraswamy, president of Complete Book and Media Supply Inc., which he started in 1997 with $2,600.

But there also are big differences in starting a retail establishment on the Internet vs. in the real world. Among the biggest is that an entrepreneur doesn’t have to invest in real estate. A retailer can be selling goods out of the owner’s apartment—and their shoppers are none the wiser.

Another big difference is that an entrepreneur needs to understand how technology operates so he or she can choose an appropriate service provider who has the capacity to give the retailer what he or she wants.

And finally, status as a credit card-accepting merchant is crucial to the success of a Web retailer. While traditional merchants can accept cash or checks until they are established, there is no way an online retailer can succeed without accepting credit cards. But many such retailers find that credit card companies won’t allow them to accept cards until they have a track record.

Internet Retailer takes a look at four companies that have managed to build something from almost nothing in a short period of time.

The tale of the tape

Company: The Cassette House

Web site: Tape.com

Headquarters: Kingston Springs, Tenn.

Founder: Art Munson

Launch date: Internet sales in 1989;
Web site up by 1994

Start-up funds: A few hundred dollars

Current revenues: Close to $1 million annually

Employees: Two (the husband/wife team
of Art and Robin Munson)

For Art Munson, all it took was a little initiative and a few hundred dollars to build an Internet business that grosses close to $1 million a year and still leaves time to pursue his first love, music projects. Munson sells tapes and related recording supplies online at The Cassette House.

It all began by accident. In 1989, Munson offered to help a friend sell 10,000 three-hour blank audio cassettes, the kind people who taped live Grateful Dead shows needed but couldn’t find in stores. Someone suggested he try to sell the tapes on the Internet, so Munson began to post notes through news groups, mailing lists and e-mail, offering the tapes for $8. The hard-to-find tapes sold elsewhere for as much as three times that amount, but even at $8, he still was making a 50% profit. “I sold them like crazy,” Munson recalls. “From there, I kept selling cassettes and added other things to it.”

By 1994, Munson had learned how to write HTML code and had set up a Web store. “I bought a book for $35 and downloaded other Web sites to learn how to do it myself,” he says. He also found public domain shopping cart software, which was written by a student, and paid the student a small amount to modify the software to suit his store.

Before he launched the Web site, Munson’s tape business had been grossing about $200,000 per year. But when the site went up, business quickly doubled and then doubled again, Munson says. Last year, growth slowed to about 20%, but revenues today are close to $1 million annually, with an average of more than 40 orders a day.

Not that everything has gone smoothly. Munson’s original Internet service provider made some mistakes, he claims, such as erasing his entire Web site and not having a current backup. So he is considering switching the site to a larger Web hosting company that has redundant servers on the East and West coasts.

Munson also had trouble finding a bank or credit card company that would sponsor him into the credit card networks. After numerous calls, he finally found a bank willing to bring him in.

An admitted “cheapskate and control freak,” Munson keeps the store profitable by doing things himself, such as packing boxes for shipping. He also has automated much of the business, such as invoicing and printing labels, so that he and his wife Robin can manage it without hiring employees. And he manages to get by with things such as an out-of-date shopping cart because he doesn’t want to hand updating the software over to anyone else. “I haven’t had time to learn more advanced programming, but when I talk to other people who will fix it for me, they want so much money,” he says. “And I’m not sure I’ll end up getting what I want.”

The real reason he’s successful, though, is because of the practice that most traditional merchants profess to observe even if they really don’t: he treats customers as if they are always right, “even when they aren’t,” he says. The lesson: Internet customers want good service just as much as real-world customers. “I had been out there slashing prices, but I found out that’s not a smart thing to do. It just kept diminishing my profit margins. People are interested in service. As long as I’m in the ballpark for prices, it doesn’t really matter that I’m not the cheapest one out there.”

Another asset is his e-mail list. Munson has been collecting addresses since he started his business and now has thousands of them. “If I have a sale, I just send out an e-mail,” he says. “I can generate cash flow in a matter of hours.”

Catching the e-train

Company: Complete Book and Media
Supply Inc.

Web site: CBMSI.com

Headquarters: Austin, Texas

Founder: Peter Coomaraswamy

Launch date: October 1997

Start-up funds: $2,600

Current revenues: $1.4 million for first full year, with a gross profit of 27.8%

Employees: Six

Within days of launching a company in 1997 to provide books to corporate and government clients, Peter Coomaraswamy knew he would have to have a Web site. “We saw the Internet train coming and we jumped on, cautiously,” he says. Today, about half of Complete Book and Media Supply Inc.’s revenues come through the Web, which Coomaraswamy sees simply as a tool to do business, not unlike a telephone.

“The Web is just a relatively easy-to-navigate catalog,” he says. Yet even though he chalked up a Web site as a cost of doing business, he wasn’t willing to go into debt to build one. Coomaraswamy had allotted just $2,600 to start his new firm. To pay for the site, he had to get creative.

“Our clients wanted something very much like Amazon.com,” he says. “We couldn’t afford that.” So Coomaraswamy showed his business plan to an old friend, Robert Swern, partner and director of account services at Intermedia, a New York-based marketing firm and online development agency. Swern liked the plan and agreed to build the Web site, which today houses information on 2.5 million books. “We came up with a deal where they worked very hard for a very small amount of money,” Coomaraswamy says. “Once we make it in a big way, they will be able to bill us at more normal rates.”

Intermedia purchased the hardware and software for the site, which Complete Book and Media Supply is paying back over time. To save money on its end, Intermedia bought standard SoftCart shopping cart software from Naperville, Ill.-based Mercantec Inc. and hired outside programmers to make it work with a database from Oracle Corp., Redwood City, Calif. “We needed a transactional shopping cart that was cost effective,” Swern says. “A customized Oracle shopping cart solution would have been too expensive—up to 10 times more expensive than the database itself.”

Intermedia agreed to help the start-up company because Coomaraswamy was very good at selling books offline, and Intermedia believed he would do just as well online, Swern says. “And that has proven to be true,” he says. “What we brought to the table was the ability to solve technical problems.”

Complete Book and Media Supply has been profitable since its inception. In its first year of business, the company brought in $1.4 million in revenues and had a gross profit of 27.8%. With cash flow generated from orders, the company paid Intermedia $90,000 over the last year, Coomaraswamy says. Because of the company’s relationship with a bank, Complete Book and Media Supply was able to secure credit card status quickly. Once the site was functioning, other banks started offering the company lower discount rates on card acceptance. Coomaraswamy used those offers to negotiate a lower rate with his bank.

Still, Coomaraswamy would like to do more. His Web site offers lots of books, but he hasn’t been able to add the tables of contents or book reviews because the business can’t pay for that yet. That may change as Complete Book and Media Supply grows. Coomaraswamy plans to look for outside investors later this year. “Whoever buys into the company,” he pledges, “will have a company that is solid, proven and making money.”

Author, author

Company: Tronix Inc.

Web site: Tronixweb.com

Headquarters: New York

Founder: Joe Cataudella

Launch date: June 1994

Start-up funds: $12,000

Current revenues: $500,000 annually

Employees: Two

When you call Tronix Inc., an online video game retailer with revenues of $500,000 a year, you may not expect the founder of the company to answer the phone. But he does. Joe Cataudella, who launched Tronix with a family member in 1994 on $12,000, also answers all of the company’s e-mail, deals with suppliers, pays the bills, updates the Web site and even reviews games. He only recently hired someone to help him pack boxes and fill orders. “I’m getting here at 8:30 in the morning and getting out at 8:30 at night,” he says. “That’s a lot of hours.”

Cataudella always has done everything himself. He built his own Web site back in 1995, for example, and even spent several weeks “tearing out my hair,” trying to figure out how to make it secure for credit card transactions.

But his personal dedication is what customers like about shopping at Tronix, Cataudella says. “The relationship with customers is very personalized,” he says. “It’s a one-on-one relationship with each person. They don’t feel like they are in some kind of assembly-line affair.” Cataudella’s efforts are beginning to pay off. He has about 7,000 customers and gets up to 65 orders a day. Last November, Tronix turned a profit for the first time. It’s been a struggle, Cataudella admits. “For the first couple of years, everything sort of paid for itself. Our customer base grew quickly, but our profit margin is very low, so that took a while to build.”

He also has learned a lot about saving money along the way. For example, he has worked with several shipping companies to find the one that best suits his needs and his budget. Another thing that makes his business viable is that he doesn’t have to stock a lot of inventory. Catudella is close to many suppliers in New York, so it’s easy to get the games he needs when he needs them.

Getting online early makes Cataudella, who also is a co-author of Creating Stores on the Web (Peachpit Press, Berkeley, Calif.), something of an Internet veteran. He visits other Web stores daily, instantly recognizing novice mistakes like overpriced shipping. “My experience makes me feel I’m a step ahead,” he says.

Starting small, bulking up

Company: GreenTree.com Inc.

Web site: GreenTree.com

Headquarters: San Francisco

Founders: Donald Kendall Jr., CEO;
Eric Budin, vice president of business development and strategic planning

Launch date: September 1997;
Web site up May 1998

Start-up funds: $52,000

Current revenues: $1.2 million annualized (based on December sales of more than $100,000)

Employees: 50

Donald Kendall Jr. and Eric Budin probably wouldn’t have had much trouble drumming up funds for their Internet start-up company, a Web-based vitamin store loaded with information and articles on health and wellness. Budin had helped launch two other online companies, and Kendall had co-founded a restaurant company in Poland with annual sales of $26 million. But with GreenTree.com, they wanted to do as much as they could with their own money first. “We felt we would have to give away too much of the company if we went to venture capitalists directly,” Budin says.

So the pair put in $52,000 of their own money to get things started in September 1997. With that capital, they hired their first three employees. The small staff began to sign big deals with advisors and marketing partners.

With the site planned and the business moving forward, they took out a loan for $650,000, the bulk of which went to an outside company that designed and built the site. GreenTree also hired several more employees, Budin says.

In May 1998 GreenTree raised $2.5 million in venture capital funding. Revenues grew quickly, reaching about $1,000 a day by last October. At that point, the company raised another $11 million in venture capital.

“It’s important to look at the sequence,” Budin notes. “We have been able to tie our financing to deliverables. First, we had the seed of an idea and we put in our own money. Then we had a real good concept, and we were able to raise the loan money. We built the site, and we were able to get the first round of venture capital money. We started to really get our revenues tracking, and we raised the second round of venture capital.”

GreenTree recently has purchased two other firms, Acumin Corp., a company that offers custom-formulated vitamins, and VitaSave, another competitor. Monthly revenues are beating projections, according to Budin. In December, they topped $100,000.

Budin, who loves being involved in start-up ventures, encourages others who are interested in building a business from scratch. “You should shoestring as long as you can, get the right partners, and then it is all about momentum,” he says. “Figure out what that succession of dominoes is, and start knocking them down.”•

Contributing editor MargaretAnn Cross is a business writer in Allentown, Pa.

How to make it on a budget

Strike a deal. GreenTree.com asked lawyers to defer billing in the beginning. Complete Book and Media Supply was able to pay for its Web site over time so it didn’t have to go into debt. Even shipping rates are negotiable, says Tronix Founder Joe Cataudella.

Automate as much as possible. Art Munson is able to run his Web store with just two employees—him and his wife Robin. That’s possible because everything’s automated, Munson says. He uses an invoice software program called Mail-Order Manager. He collects orders from his Web site and his call center’s online bulletin board and imports them directly into the invoicing program. Then he sends the orders to a credit card center for authorization in a batch via modem. Once the orders are authorized, Munson transfers them back into the invoicing program with the authorization codes. From the invoicing program, Munson transfers the data to UPS online software, which creates all of the mailing labels. “I don’t have to retype any information,” Munson says.