Stake Your Claim -Contrary to popular belief, there’s no need to ante up a fortune when you’re playing the startup game.

Here’s how 3 entrepreneurs launched high-cost businesses the low-cost way.

For most people, the idea of starting a business roughly equates to the idea of emptying your bank account, thumbing it to Vegas, and betting every penny on one hand of blackjack. You might be a blackjack guru; you might have even won big in the past. But no matter how carefully you plan, no matter what your cards looked like before, and no matter if the dealer tosses you an ace—you could still go bust.

Entrepreneur magazine http://www.entrepreneur.com/Magazines/MA_IssueArchive/0,1400,117411,00.html – July 2004
By Karen E. Spaeder
URL: http://www.Entrepreneur.com/article/0,4621,315990,00.html

That alone is enough to halt many would-be entrepreneurs in their tracks. Factor in the empty-bank-account factor, though, and many startups don’t even make it out of the gate.

Would it surprise you, then, to know that sometimes your careful planning, meticulous business plan and brilliant marketing ideas don’t have to go to waste—and don’t have to cost a fortune? "I know it can be done. And that’s one of the first things people need to understand," says John P. Hayes, co-author with Fred DeLuca, Subway’s co-founder, of Start Small, Finish Big: Fifteen Key Lessons to Start—and Run—Your Own Successful Business http://www.amazon.com/exec/obidos/ASIN/0446677566/entrepreneurcom/ . "It’s not money that’s in the way of you starting your business. It’s a mind-set."

Even if your startup aspirations are as lofty as a fitness center, a car rental business or a hotel—not typically the cheapest businesses to start—you can start small without breaking the bank. (The big-growth part comes later.) So pull up a chair, and shuffle your own cards. Your next hand could just hit 21.

Starting a Fitness Center

It’s a good thing Tom Hatten was just 21 when he started Mountainside Fitness http://www.mountainsidefitness.com/ in 1991. He needed all the energy he could muster to put together his Chandler, Arizona, fitness center—not to mention the energy to wash gym towels at home ’til 2 in the morning for the first year, until he could afford a washing service. "I worked 100 hours a week and kept my other job [painting houses] for six months," recalls Hatten. "As much stuff as I could physically do [myself], I did."

That self-starter approach is what helped Hatten stretch the $2,000 he had in his pocket at startup as well as the $15,000 he borrowed from a friend and another $15,000 from his local bank, where his good credit on a car loan served him well. That $32,000 covered computers, advertising, and about half of the equipment for the 4,800-square-foot facility; money for the remaining equipment was raised through membership pre-sales totaling $12,000.

How did Hatten, 36, manage to equip a gym on a budget? "I bought all used equipment," he says. "Just clean it up, get it painted—get ones that have warranties. If it doesn’t look shoddy, members only care if it works."

While cutting costs is important, it shouldn’t be your sole consideration. "Instead of cutting costs, it’s best just to make a wise investment," says Jon Giswold, an author, industry veteran and founder of JMG Management http://www.jongiswold.com/ , a New York City fitness-center management company. "Do some research. Investigate what it would [cost] to buy directly from the manufacturer. They’ll tell you if you can get a better price if you buy directly."

Before you consider buying machines, though, think about your location. "I put my club where there was no competition," says Hatten, who now has five clubs with sales totaling approximately $7 million, 400 employees, and a membership roster 21,000 clients long. "From there, I tried to give a lot of service that wasn’t [standard] in the industry"—such as no contracts, no reservations for child care, parents’ night out, free family day on Sundays, and other perks.

Giswold advises you to take a careful look at the space in your club: "Look at the floor layout," he says. "Do machines consume the whole space?" Is there enough room for yoga or ab work? With elliptical trainers being so popular, do you need a lot of stair-climbers? "Really what people like to use is a treadmill," he adds. "They’re always used—with the second [most popular] being elliptical machines."

Once you decide on machines, arrange them logically—even novice users should know what to do. "If you start at one end and try every machine in succession down the line, [you should get] a good workout," says Giswold, noting the success of the Curves concept.

Deciding whether to offer classes, child care and other extras depends on your available startup funds and your appetite for growth. Check out the local competition’s offerings, and go from there. Says Giswold, "What I’ve seen is that the big clubs are offering services, like certain classes, for additional fees."

Yes, you will break a sweat getting started. But ask Hatten, and he’ll tell you it’s worth it. "You gotta love what you do, because you’re married to it," says Hatten, who hopes to open three more clubs in Arizona and then expand his business out of state.

Renting a Dodge Viper in Maui in 1997 wasn’t enough for Steve Bandovich. When the 35-year-old Roselle, Illinois, founder and owner of the one-person Cloud 9 Specialty Car Rentals http://www.exoticcarrentals.com/ returned from his Hawaiian vacation, he decided Chicago sorely needed its own specialty car rental service.

One perk of starting a car rental business is that you can start from home, as Bandovich did, with just one or two vehicles. Bandovich took out a $50,000 home equity loan to purchase a used 1996 Dodge Viper GTS, which he later replaced with a Dodge Viper SRT-10. He has also added two Hummers and a Porsche 911 to his fleet. With another $12,000 of his own money for attorney and accounting fees, a computer, advertising, and other various startup necessities, getting started in 2001 was relatively smooth for Bandovich—until it came to insurance. He says, "Finding a company that would insure me for liability and collision—that was a major hurdle."

Experts agree, insurance is one of the biggest challenges in this industry. Insurance brokers are looking for "loss experience"—an indication of how much premium you paid during a given year and what your loss ratio was. "It’s very difficult to get insurance when you don’t have any loss experience," says Rocky Dellapenna, founder and owner of Paoli, Pennsylvania-based Champion Enterprises http://www.championexoticrentals.com/ , which rents both standard and high-line cars via Champion Car & Truck Rental and Champion Exotic Car Rental.

Short of buying into a franchise program, where the insurance and financing are already in place, Dellapenna—an industry veteran of 30 years—advises buying an existing business. "If you were to buy an established [business], then they would turn you right over to their insurance services, broker and so forth," he says. "As long as you had good credit and good backing, you could step right in and go turnkey."

Bandovich didn’t need to go that route. He’s got full coverage, at about $200 to $500 per car, per month. But operating in Chicago, he does have to plan for the inclement weather that keeps many people off the streets—not an issue for those in warm climates. "Our Hummers help get us through the winter," says Bandovich, who brought in more than $100,000 last year and is shooting for $175,000 in 2004.

Bandovich’s secret is operating lean. He spends $150 a month on rent for his office space and less than $200 a month on advertising. Marketing tactics have included driving the Viper to car shows and handing out a few thousand business cards.

Remember, if you decide to operate a standard car rental business, you’ll be marketing to a different kind of customer—one who needs to rent a car, not one who wants to drive a nice car just for kicks. "With car and truck [rentals], the first thing people do is go to the Yellow Pages," says Dellapenna—and that kind of advertising can cost upwards of $9,000 annually. "But you have to have an Internet presence for high-line cars. People look for it there."

So what’s your best bet—cars and trucks, or Vipers and Hummers? "There are more people renting the high-line cars right now," says Dellapenna. "They figure, [that] instead of going out and buying one of these expensive cars…they’d rather rent one for a weekend or a week."

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Opening Bid

In Start Small, Finish Big: Fifteen Key Lessons to Start—and Run—Your Own Successful Business (Warner Books), Subway co-founder Fred DeLuca, with co-author John P. Hayes, shares 15 lessons to start and run your business on a shoestring. Lesson Six—Ready, Fire, Aim!—reminds entrepreneurs that lack of experience shouldn’t stop you from opening your business. "In other words, I learned it by doing it and not just thinking about it," writes DeLuca, who started Subway with $1,000. "With clarity about the idea for Subway and at least a glimpse of the vision, I went to work the next day!"

While there’s much to be said for plotting your course, you don’t want to let the planning process consume your will to get started. At some point, you just have to do it—otherwise, you never will.

That’s why it makes sense to start your business on a small scale, leaving yourself some wiggle room. "If you make a mistake," DeLuca says, "if your aim is off, you can fix it and fire again—and adjust again, and again, as needed.

"If you’re willing to fire before you aim perfectly, you probably won’t hit your target precisely; but you’ll have taken that first step in the journey of a thousand miles."

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If interviewing Chip Conley during his vacation in Lake Tahoe—on the California-Nevada border—is too much of a cliché of how your life could look, then call us pedestrian. "It’s important to have time off. The first couple of years, I didn’t get enough of that," says the hotelier, who started his hotel management company, Joie de Vivre Hospitality http://www.jdvhospitality.com/ , with just one hotel and now operates 30 hospitality businesses in Northern California, 25 of which are hotels.

What was once a "no tell motel" became The Phoenix Hotel in 1987, when Conley was 26 and itching to create a haven for hip young travelers, artists and musicians on the road. Buying the space for $800,000—a bargain in hotel terms—Conley then spent about $200,000 on renovations. Four months later, The Phoenix Hotel was ready to show its new face to San Francisco. "We completely cosmetically renovated the hotel," says Conley, who raised the money from friends and family. "Every room in the hotel was dedicated to an original San Francisco artist."

Conley appealed to a youthful niche audience with amenities such as a massage treatment room, where musicians could work out their pre-performance jitters, and an "underground" San Francisco guidebook for every room. After achieving first-year sales of $600,000, Conley pressed on, opening his second and third hotels. By 1990, sales had reached $3 million; and between 1993 and 1997, Joie de Vivre grew from three to 13 hotels. Now it’s a $75 million company with 1,000 employees.

That success is due, in part, to Conley’s decision to buy an existing hotel. "It’s usually too expensive to start from scratch and make it work," says Conley, 43. "It’s better to cosmetically upgrade something that’s already been there."

"Unless you’re an established developer or a hotel company, building something from scratch is probably not the right way to do it," agrees Gregory Peck, a hotelier whose background includes investment banking, real estate investing, and hotel development and management. Peck, who put his hotel and real estate background to use in 2001 with the purchase and renovation of The Beverly Crescent hotel in Los Angeles (now called The Crescent), recommends acquiring a property for "less than replacement costs." According to Peck, "You’re dealing with older buildings and the limitations imposed by these properties, but it’s cheaper and a simpler process."

Not that starting a hotel is simple. "It’s a daily, 24-hour-a-day responsibility," says Peck. Another hurdle: local zoning restrictions. "We didn’t understand how long it would take to get the city to approve what we wanted to do," he says. "Read the fine print and the details. Sit down and talk to people who might know about what you’re doing."

Finding a niche will set you apart from big chains—you’ll cater to a market that’s looking for something beyond run-of-the-mill. "Every one of our hotels has a different personality," says Conley. Every time he creates a hotel, he imagines a magazine and five words or phrases to describe that magazine—for instance, for The Phoenix Hotel, it was Rolling Stone and "funky, irreverent, young-at-heart, cool, adventurous."

"The most important thing is to create a positive memory for the guests," says Conley. "You need to think about how you can create a compelling and remarkable experience."

Playing the Odds
Whether it’s a fitness center, a car rental business or a hotel you want to start, the odds are in your favor, given recent statistics. If you tailor your business to accommodate the current demographics, your chances of success are even greater.

Fitness Center: According to "Health and Fitness Clubs-U.S.," a January 2004 study by market research firm Mintel International Group Ltd.:

* Total health and fitness club membership neared 38 million in 2003, or 18 percent of Americans 18 and older-an increase of 28 percent over the past five years.

* Twenty percent said they were reluctant to join because they feared they would feel out of place. That bodes well for frills-free and niche clubs catering to this uneasy segment.

Car Rental Business: Looking for a specialty car rental niche? Check out J.D. Power and Associates’ "APEAL" (automotive performance, execution and layout) study, an annual ranking on the makes and models of cars Americans love to drive:

* In 2003, the Lexus LS 430 was the highest-rated premium luxury car; and the BMW Z4 was the top premium sports car (beating the Chevrolet Corvette and the Porsche 911, which tied).

* According to a Travel Industry Association of America (TIA) study, "Auto Travel in the U.S., 2003 Edition": Seventy-nine percent of U.S. domestic trips are being taken by car, truck, camper/RV or rental car. The market has increased 11 percent since 1994.

Hotel: From the "Travelers’ Use of the Internet: 2003 Edition," an annual study by the TIA:

* Two-thirds of the 95.8 million travelers who are online used the Internet to make travel plans in 2003. Use of the Internet to book travel continues to rise.

Karen E. Spaeder is a freelance business writer in Southern California.

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