• Tweet
• Sharebar

• Tweet

I’ve written an article on why startups are a good idea during a recession and another article on how to fund a business.

Both of these articles came to mind when I read about Costco’s rise to glory in the early to mid 80’s.

How did they do it?

Raising Money

In 1983 they opened the first Costco, in Seattle, financing the business with savings and credit cards.

A lot of personal finance blogs chastise the idea of financing a business using debt, especially high-interest personal debt like credit cards. However, I respectfully disagree with all of their concerns.

Perhaps it has to do with the entrepreneurial mindset, but I believe in the risk vs reward mantra. If you believe that you have a good idea, but don’t have the financing, then you should certainly risk your money. In turn, if you have done your due diligence, you will get rewarded. Certain business concepts are time-sensitive. If you get scared by debt and decide to wait til you can “cash finance” your business, you may be too late by the time you hit the ground.

Certainly, I would never advocate using your child’s college fund or remortgaging your home for a business idea. You should never jeopardize your family’s security for a business. But take risk for a great idea? I would!

Hiring the Right People

"I called around to retail contacts and asked them to list executives who could run such a business. Jim was on most lists. I cold-called him one day and flew to California to meet him," Brotman recalls.

Often times businesses take the approach that money solves all problems. If they just throw money at the problem, it will eventually solve itself. That’s pretty unfortunate, because those companies find out the hard way that they are wrong.

What is one of the most important assets of a business? In fact, it can sometimes be looked at as a competitive advantage. It’s PEOPLE.

As Brotman shows above, before he dove in to the business head first, he made sure to secure someone who had a reputation for being able to run the business. This is important if you don’t want to lose your investment.

Reacting to Market Changes

To a certain extent, scale was forced upon us by outside events. When Wal-Mart announced it was going into the discount warehouse business, we had to compete and grow quickly.

This ties in to what I said above about timing being everything. Had Brotman and Sinegal opted to not finance the business using credit cards, it may had taken them a few more years to get started. Or maybe they would have never started! And as the quote right above shows, they decided to scale a lot larger because of Wal-Mart’s entry into the market.

Would Wal-Mart have entered the market without Costco having entered the market? Possibly. Possibly not. And that is the chance we take in business. Something tells me Brotman and Sinegal are happy that they made their decision.

Besides all of that, though, this is a great example of a company reacting to a shifting market. They were at a point where they had a few stores that were all operating profitably. And then BAM, Wal-Mart decides to compete in their market. What do you do? Do you keep growing slow and stready? Or do you sell some equity and start expanding rapidly so as to not be outdone and wedged out of the market?

Cost-saving Principles Throughout the Company

Costco’s cost-saving ethos extends to its corporate overhead. "Even once we had money, Jim and I drew a relatively modest salary — $75,000 per year — for a long time," Brotman says. In 2008 each drew a salary of $350,000, plus an $80,000 bonus. Each also received stock and option awards in excess of $4 million.

This is the way I like to see business run. Each of the founders only drew $75,000 in salary in their growing years. Of course, they got sweat equity out of all of their hard work – and that is worth millions and millions of dollars, now. BUT, you rarely see a business run like this nowadays. People want to make it big the second their business succeeds. They don’t reinvest the money, they take it out of the business.

Even now that they are a $70 billion+ revenue company, they take a rather modest income of only $350,000. Their stock and options totaling $4 million is acceptable, to me.

Summary

Costco represents the way to start a business successfully. They took a HUGE risk by maxing out their personal debt. And within 3 years they were running a $3 billion company.

Can this happen to you? Potentially. But you need to have the right mindset.