LABORING AWAY Bob Cratchit-style under the constraints of corporate hierarchy, millions of workers fantasize about going out on their own. And in tougher economic times, when pay freezes and downsizing stall many careers, self-employment can look even more attractive compared with wage slavery at Scrooge & Marley LLC. So it's no surprise that more than 600,000 start-ups get launched every year. Of course, many of the people who launch them wind up wishing they'd stayed safe in the arms of Big Brother: About a third of all entrepreneurial ventures fail in their first two years, according to the National Federation of Independent Business. In this risky undertaking, innovation can make the difference between success and also-ran status. Business gurus say that entrepreneurs who are animated by a novel, game-changing idea can be more enthusiastic about the seven-day weeks and trial and error it takes to get a start-up off the ground. By filling an unmet need, their companies can attract investors more easily and grow faster. And being small doesn't have to hold them back.

"These days a stealthy start-up with $10,000 can compete against -- and overtake -- slower Fortune 500 companies," says Tim Ferriss, best-selling author of "The 4-Hour Workweek," a bible for the entrepreneur-oriented workforce. Sure, aiming to overthrow Microsoft or Wal-Mart may be setting the bar a bit high. Even the most creative newbies may find it hard to get seed money in the current lending climate. Nonetheless, read on: We've found inspiring stories from two business owners who have learned just how far a good idea can take them.

In Sickness and in Health

Kent Dicks is such a fan of running a small business that he's done it twice. First, he left financial titan American Express -- where he started out as a programmer and eventually became a manager -- to start an IT staffing firm. Then in 2005 he and a group of software buddies took one great idea and spun out a little company called MedApps in Scottsdale, Ariz. It turns out, the idea was so good that the firm isn't so small anymore. The concept? People suffering from chronic conditions like diabetes and heart disease need a better way to be monitored by health care professionals, rather than just checking in with a doctor every few months or years. Caring for patients with chronic conditions gobbles up four-fifths of all U.S. health care spending, or $1.4 trillion every year, according to the California HealthCare Foundation. But it's estimated that for seniors with multiple chronic conditions, 40 percent of hospitalizations could be avoided altogether with proper outpatient monitoring. MedApps' solution: a low-cost device that uses Bluetooth and cellphone technology to take everyday health data, like glucose readings, and relay it to a central server, where it can be accessed by caregivers. The devices start at under $300 and replace older, clunky boxes that plug into regular phone lines and cost thousands of dollars.

"There was nothing on the market that allowed people to go about their daily business and still be monitored," says Dicks, 47. "Now, if my elderly mom forgets to take her blood-pressure medication, she'll get an automated call to remind her. When my daughter, who has diabetes, checks her glucose three times a day, I'm able to monitor that from wherever I am and make sure she's all right.

"The innovative idea was developed by Dicks with a team of nine other people who kept their day jobs but met every Saturday for a year before the business launched. Dicks put up much of the start-up money himself, to the tune of a half-million dollars, in return for 51 percent of the company. (He still owns a controlling share.) Though any start-up is a gamble, this one seems to be gaining traction. Last year's sales at MedApps were $700,000, and the goal for 2008 is $3 million. Many clients are disease-management companies interested in handling illnesses before they become catastrophic, in outcome and costs. Dicks, who logged 10 years at American Express before going out on his own, says that being part of a ragtag group of programmers was far preferable to being in the bowels of a huge firm. "Being in a big corporation slows down innovation," he says. "It's just a natural fact, and they admit it themselves." When you're smaller, "you can move faster, make key decisions and run ahead of the pack." Dicks's advice for entrepreneurs: Don't fall in love with your invention. However fabulous it may be, you also need to grapple with the very practical issues of bringing an idea to the public.

Shaking the Money Tree
With the economy shaky and banks reeling from the subprime debacle, getting financing for a small business is particularly challenging this year. Here are some key tips for tapping three big sources of funding.

The Banks. In April, 50 percent of U.S. banks reported tightening their lending practices, compared with just 30 percent in January. So borrowers should focus more than ever on what banks call the three C's. There's capacity, evidence that the business will generate an income; collateral, other assets to offer the bank if the start-up doesn't, er, start up; and, of course, character -- proof that you're not the type to take the money and run.

The Feds. If a bank deems a business too risky, an entrepreneur can still get a loan, with help from a guarantee from the Small Business Administration. The federal agency will generally promise to cover 50 to 75 percent of the loan if the borrower defaults. But the market is getting more competitive: In the most recent quarter, the SBA guaranteed 20 percent fewer loans than it did in the same quarter last year. Who tends to win? Businesses whose management has a lot of relevant experience.

Angel Investors. Angel investors are like local, smaller-scale venture capitalists -- they invest in start-ups in return for ownership stakes. Angel groups are usually made up of current or former business owners, and they often choose businesses they personally identify with. They also tend to have sensitive BS meters, so a meticulous business plan is a must. There's a directory of angel groups at www.angelcapitalassociation.org.
-- Erin Geismar

As Dicks says, "Is there a real market for this, where are we going to generate revenue, and who's going to pay for it?" After that, you can create a moat around your innovation that serves as a barrier to competitors -- whether it's getting the proper regulatory clearances early or filing a flurry of patents (31 applications in MedApps' case). But at the heart of success, there's always that One Great Idea. "If someone can be monitored for $10 a month instead of hundreds, that rewrites the whole health care system," says Dicks.

If the Shoe Fits

Candra Palmer grew up in Chicago, acting as an assistant for her seamstress mother -- shopping for fabrics, doing beadwork and even putting on amateur fashion shows for friends. So perhaps it was inevitable that she'd turn that passion into a business. Today Palmer is founder and president of Los Angeles-based Artyce Designs, a company that brings the Build-a-Bear concept to luxury footwear -- customers can design their dream shoe, top to bottom, or pick one of Palmer's ready-to-wear creations. For shoe lovers, of course, it's something approaching nirvana. "My girls' feet are always fabulous," says Palmer, "and they can walk around knowing no one else on the planet owns a shoe like theirs."

It wasn't a straight path, though. Palmer started her career at chip maker Intel in the marketing department, helping roll out products like the Pentium 4. It was a natural fit for the self-confessed "techie," who got her IT degree from Xavier University in New Orleans. At Intel she absorbed lessons about the supreme importance of branding. But Intel also inadvertently taught her how to leave -- when the company relocated her to Los Angeles from Oregon and let her work from home, she realized she didn't have to spend her career in a stifling cubicle from 9 to 5. The fashion world soon proved more appealing than microchips to Palmer. While still at Intel, she interned on the side for a firm that provided stylists for celebrities like Halle Berry. From there, she moved to a fashion consulting firm full-time and then to a garment manufacturer, drinking in critical details about the business. All along, she'd been making shoes for family and friends as a hobby out of her tiny, one-bedroom apartment. When she'd visit high-end stores like Neiman Marcus, she says, other customers would clamor for the shoes she had on, which featured glitzy beadwork that outshone the more staid designs on the stores' display racks. "I thought to myself, 'Hmm, maybe I have something here,'" she remembers. Her breakthrough moment arrived when a friend in dire straits came to her, lamenting that she couldn't find the perfect wedding shoes. The heels were too high, or the color or texture wasn't right, or they were just too plain. Palmer gathered some extra material, straps and embellishments, and the two created a dream shoe to take her friend down the aisle. That's when the lightbulb went on: Palmer could help everyone, in essence, be her own designer.

Until that point, Palmer's business consisted of different shoe-making "stations" built around her couch, where she toiled on footwear shipped in from suppliers in Brazil. But her break came at the end of 2004, when Ebony magazine asked her to contribute her creations for a photo shoot. "That moment launched everything," she says, as more stylists began coming to her for red-carpet inventions for their clients. Since her overhead was so low, Palmer was able to expand her business entirely with her own funds. She drained $6,000 from her old Intel 401(k), buying enough raw materials to be able to work on her business full-time. To move into a shop, though, Palmer needed more cash. She courted investors, including many who were drawn by the post-Ebony buzz, but all wanted some element of control. Palmer didn't want to cede creative power, so she raised $50,000 from family and friends and opened her shop in Culver City in 2007.

At the store, buyers (including a blizzard of bridal parties) come in and can choose the ingredients of their ideal footwear. If you're just strolling by, though, don't bother: It's by appointment only. Judging purely from the numbers, Artyce has been a raging success. The company generated $300,000 in revenue in 2007, and Palmer expects to at least triple that in 2008. The original investors have been paid back, with interest, and Palmer retains total control over Artyce, with four staff members working under her. Not bad for a 30-year-old who, not long ago, was helping her mother stitch and dreaming of dressing the celebrities she saw on TV. Says Palmer to other entrepreneurs: "Find your niche, don't duplicate what others are doing -- and really do your homework. I did years and years of homework."

Also see:

• Starting Up: How Much Money Do I Need?
• Starting Up: The Thrill of the Launch
• Starting Up: Learning to Pitch