'I Can't Tell You Why We're Growing': A New Bike Store and the Mystery of Start-Up Success

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Huckleberry Bicycles was a leap of faith, and now it's a booming small business. But why? Brilliant business plan, strong execution, quality service, effective advertising, location ... all of the above, or none? Even the co-founders can't say for sure.

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Tech startups are hard. Building a company that grows rapidly is confoundedly 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.

HUCKLEBERRY BICYCLES

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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. 

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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

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?

HOW TO LAUNCH A BIKE SHOP

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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. 

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Rohin Dhar is the co-founder of Priceonomics.

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