“Let’s start with a distinction that should be obvious but is often overlooked: not every newly founded company is a startup. Millions of companies are started every year in the US. Only a tiny fraction are startups.”
- Paul Graham, Startup=Growth
Tech startups are hard. Building a company that grows rapidly is confoundingly difficult. You have to come up with a great idea, fund the business somehow, and then you have to actually do what you say you were going to do. If it were easy we’d all be wearing monocles and yukking it up over fine whiskeys instead of staying up late coding or blogging about toilets.
But most things in life that people aspire to do aren’t easy. People start businesses all the time, and most of them aren’t software startups. They’re opening restaurants, shops and professional service organizations. This sounds really hard too. If you open a shop, how do you know you’ll get any customers?
So at Priceonomics, we were curious. What does it take to start a “real business” like a retail establishment? How do you go about doing it? How much does it cost? If you open up a shop, how do you know people will come? In many ways starting a “regular business” seems more challenging than founding a startup. If you’re the nth Indian restaurant on Castro Street, how do you make it work?
Since we are mildly obsessed with all things bicycle related, from bike price guides, stolen bike economics and catching bike thieves, we thought we’d start there. How do you go about starting a bike shop? Lucky for us, we knew some folks we could ask.
Around the same time we started Priceonomics, some of our friends launched a new bike shop in San Francisco in the Fall of 2011. There isn’t exactly a shortage of bike shops in San Francisco, so it certainly wasn’t clear this was a slam dunk good idea. Even more interesting, they decided to open their shop in one of the “worst areas” in America - San Francisco’s Mid-Market District. Amidst the drug addicts and strip clubs, could you sell speedy commuter bikes and stylish cycling pants?
Huckleberry Bicycles was started by three friends, Brian Smith, Jonas Jackel and Zack Stender. Brian was a corporate lawyer. Like all corporate lawyers, Brian was miserable (seriously, are any happy?) and wanted start his own company. He had been friends with Jonas since their college days at Grinnell. Jonas was an experienced bike shop guy and he recruited another bike professional, his friend Zach to be the third founder.
The founders scrounging for wood they could use in their store.
We sat down with Brian Smith for a beer to talk about the start-up costs and economics of starting a bike shop. Here is their entrepreneurial story.
The start up costs and financing of a bike shop
On day zero when Huckleberry was still a concept, they calculated they needed $300-$350K to get started if they managed their costs aggressively and did a lot of the work themselves. That amount would allow them to find and renovate a retail spot, give them a budget for initial inventory, hire a first employee, and provide a buffer to last at least a year.
Because two of the founders were former bike shop employees, they had a fairly accurate idea about what the costs would be. They projected they’d need a 2,000 square foot store and the rent would be $6-8K per month (they only targeted less expensive neighborhoods). Renovating the store would cost about $100K (they would do most of the work themselves). The initial inventory to get started would be about $75K, and $25-50K would cover miscellaneous expenses. They left themselves $100K as a buffer so they could confidently hire a fulltime employee to run their service center. As it turned out, their actual expenses were in line with their initial projections (nice work!).
The founders would put in a small amount of initial capital but the vast majority would be financed. They considered bringing in additional equity investors, but ultimately decided they were looking for such a little amount of capital that it didn’t make sense to give away more of the company.
2010 was a tricky time for a new small business to raise money from a bank. The company was an unknown quantity with no financial history or assets for a bank to review. At the same time, the founders were willing to personally guarantee the loans and had good credit and personal assets. A loan would be critical because no landlord would give them a lease without the loan in place first. At the same time, without a lease the bike shop was just an esoteric concept that would be difficult to fund.
In an unexpected twist, the San Francisco city government really helped them start their business. San Francisco’s Office of Economic and Workforce Development got wind that these gentlemen were interested in starting a bike shop in the midst of the drug addicts, prostitutes and stolen good fencers of Market Street. The Workforce Development office connected them with a lender who was willing to underwrite the loan and introduced them to their eventual landlord. Whoa, government works sometimes. Who knew?
Getting to work - launching the bike shop
Getting started on renovations.
With the financing and a location in place, they could start turning a dilapidated storefront located next to a strip club into a haven for urban cyclists. First, they needed bikes to sell. The bike industry operates a lot like the car industry. The bike manufacturers like Cannondale sign contracts with bike dealers to give dealers exclusive rights to selling the bikes in geographic areas. That way the dealers are insulated from competition and the manufacturers can keep prices where they want them. Almost no brand name bikes are allowed to be sold online.
The first bike manufacturer that Huckleberry talked to backed out just before signing the contract. They were concerned that another one of their dealers was too close for comfort. Luckily it was fairly easy to sign up other bike vendors. It turns out, companies like to work with people that want to sell their products! In quick succession they signed up vendors like Cannondale, Felt, Masi, Public Bikes and many more.
Once you sign a deal with a bike manufacturer, you need to buy their bikes. Most bike dealers will give you a line of credit to finance your inventory with a 0% interest rate as long as it’s paid in time (this can vary from 30 days to 6 months). Even still, about half the bikes in inventory are purchased immediately and all soft goods like bike clothing, locks, racks and lights are bought outright.
Across the industry, the average retail gross margin on bike sales is 36%. So, if you see a bike for sale for $1,000 the store can make a gross margin of $360 on it. For soft goods the industry standard margins are 50%. These margins are fairly stable and can’t really be controlled by the store. The average bike store earns 40-42% margins since they sell a mix of bikes and soft goods.
Since the margins are predictable, revenue projections give you a good idea about how much margin you’re going to have to pay for peoples’ salaries and your rent. Gross margins are critical. The business would need to hit certain sales goals or it would predictably implode.
One year from when Brian quit his job at a law firm, Huckleberry opened for business.
How the first year went
“Before we got started, we made all these aggressive predictions about our revenue. We meet with an accountant and she was like, get out of here, these numbers are crazy. So we went back and made much more conservative assumptions. We ended up beating those projections for our first year, but it was good to be conservative otherwise we might have made bad spending decisions.”
The first year went well. Really well for a brand new business. Huckleberry’s sales exceeded even their more aggressive set of projections. Three months in, the founders were able to start paying themselves. Eight months later, they could afford to pay themselves a livable wage.
“Yeah, I remember the first bike we sold, it was awesome. I remember our first $1,000 day and that felt incredible. Then we had a bunch of really big sales days and you need something even bigger to get the same rush.”
At some point, the team of four people wasn’t sufficient to handle the business that was walking in the door. Sales were falling through the cracks. Now they’ve expanded the team from four to twelve people. Every time they’ve added a new team member, the investment has paid for itself with extra sales. They’ve never had to touch the $100K buffer that they budgeted when they started the company.
“We’ve grown a lot in the past year, but I can’t tell you why we’re actually growing. Sure, every time someone walks in the door, we give them the best possible experience and we really do make them happy. But why do more new people walk in each day? I don’t really know.”
Perhaps the most interesting part about talking to Huckleberry was that it’s hard for them to pinpoint why they are acquiring more customers. They’ve built up perhaps the best bike experience in San Francisco in just a year, but why do new people walk in the door? They buy Google and Facebook ads, but they have no way to track how they convert. They’re located on a main bike thoroughfare so commuting bikers can discover the store, but at the same time they’re in a bad neighborhood so it’s hard to know how the location helps or hurts. They try to deliver on satisfying every customer and create positive word of mouth, but it’s impossible to measure what part of their marketing is driving new customers and what part is wasted spending.
In many ways, starting Huckleberry was a leap of faith. If you build it, they will come. And they did. Remarkably, they’ve been able to invest more in inventory and staff, and those investments have paid off. But the exact reason why they are growing? Helpful service? Word of mouth? Location? It’s impossible for Huckleberry to pinpoint.
Software Tools They Use to Run Their Business
Huckleberry runs its entire business on cloud-based apps. The most important piece of software in their business is their point of sale and inventory management system called MerchantOS. They absolutely rave about it and it only costs about $50 a month and has a solution specifically for bike shops. The app tracks their inventory and also tracks the inventory that their vendors carry. For example, if a customer asks for a specific bike rack, Huckleberry can instantly check if they have it in stock or if they can order it from one of their vendors and then make the sale. Pretty powerful stuff.
They use Square purely for payment processing but not for its point of sale system. Email is run through Google Apps and bookkeeping is done using QuickBook Online.
They’ve spent $10,000 getting their website up. They originally paid $6,000 for the site but were unhappy with the result, so they had it redone a few month later. They have a Shopify page that they load some accessories on and there are some occasional online sales but it’s not a huge emphasis. They mention the bike brands they carry on their blog so sometimes people show up to the store because they Googled “cannondale san francisco”.
Beyond that, they don’t show all their actual bike inventory online. Keeping that up to date would require a lot of maintenance and mental overhead. For Huckleberry, having a good website is important, but it’s not going to make or break them. To them, they’ll succeed or fail based on the customer’s experience when they are in the shop and that’s what they want to nail. They’re not going to succeed by building the world’s best bike website.
"If I had started this business projecting that we’d fail, we wouldn’t have started it. It’s not an option to fail. My partners have kids and houses and it’s not an option.”
It’s commonly asserted (and presumably true) that most retail businesses like restaurants fail. The competition is intense, the labor costs are sky-high, and customer demand can be fleeting.
The founders at Huckleberry took a risk in starting a bike shop and put everything into it to make the business work. When you walk into their store in downtown San Francisco, it’s immediately clear that staff cares about helping you, whether you’re a novice biker or insane randonneur. You can even hang out and play Tetris! It feels different than any other bike shop in San Francisco and that was the founders’ plan.
Talking to Huckleberry, it also seems clear that the most important software tools for small business haven’t been invented yet. There is no “google analytics” for a shop or measurable ways they can promote themselves offline or online. Somewhere in all of this, there is probably a billion dollar startup idea or two.
This post was written by Rohin Dhar. Follow him on Twitter here or Google. Thanks so much to the team at Huckleberry for answering our questions about bike shop economics. They are seriously the best. Get the latest from Priceonomics on Facebook or Twitter.
April 16, 2014 · 28,805 views
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