The vast majority of companies get started on a tight budget. There have certainly been many startups funded by big-money that have rocketed to success, and these are the startups that get the media attention. Statistically speaking, you’re much more likely to start a business without venture capital and grow your business using debt and retained earnings.
Venture Capital – a Poor Fit
Many entrepreneurs are understandably disappointed when their “great idea” gets turned down by a venture capitalist. The reality is that venture capital is often not appropriate for the typical start-up. Venture capital traditionally favors product offerings that go after hundred-million dollar markets, while new businesses often start off by pursuing niche markets that are too small to be of interest to venture capitalists.
Few new businesses start off with a truly original concept or proprietary technology. Instead, they generate profits by relying on better execution and vigor. The advantage of many new business owners is their ability to be nimble and flexible, adapting quickly to changes in the market place. For a startup, adaptability is often more important than heavy planning and foresight, but venture capitalists tend to prefer projects that have been carefully planned that target well defined markets.
Pitfalls of Using Other People’s Money
Funding can certainly have it’s advantages, such as for exploiting growth opportunities that would otherwise be forgone because of a lack of resources. There are however, many instances where too much investor money too early can be detrimental to your flexibility, discipline and efficiency.
Bootstrapping in a startup forces you to make sure every penny is well spent and uncovers problems early that the company has to solve. Many entrepreneurs feel they need money to be able to do lots of things right from the start. What often happens is that the money gets used up, with no profit to show for it. Instead of addressing the underlying problems, they say “we need more money” which only temporarily takes care of the symptom.
Rarely will a startup get everything right the first time. Success requires the ability to change direction and handle unforeseen setbacks. Failure to meet initial goals doesn’t mean the company won’t be successful in the future. Outside investors can hinder a small startup’s flexibility and the “try-it, fix-it” approach that is often required. The prospect of major changes to company direction can scare investors – they will wonder whether the original concept was wrong or whether it was badly executed. They will also wonder if putting more money to support a change in direction will mean being fooled twice. Entrepreneurs tend to avoid confronting investors in the early days of a business. Detrimentally, founders often stick with their original plans even as they lose confidence in them, in order to avoid conflict with investors.
The bottom line is that if you’re unsure about your market, or don’t have the experience to deal with investor pressure, you’re better off starting your venture without other people’s money.
Guidelines for a Low-budget Start-up
New ventures without a lot of money need to employ different strategies than well-capitalized start-ups. The following guidelines will help serve the typical bootstrapper:
Get up and running as quickly as possible
Don’t wait for “the big idea”. Starting off with an unoriginal idea targeting a smaller market shouldn’t bother you. Many businesses start off with a “me too” strategy and once the business gets going, opportunities come up that might have been left unseen had the founders waited. This approach will save you from the cost of extensive initial market research, and you’ll be less likely to face as much competition from large, established companies.
Go for quick money making projects
Even if a potential project isn’t a perfect “fit” for your basic strategy, you should take advantage of your small business’ flexibility. To generate revenue early, take on projects that the typical large and well-funded company would consider a distraction. A money making business will build your self confidence as well as credibility among your customers, suppliers and employees. For example, many entrepreneurs generate cash flow in the early days by providing part-time consulting services.
Go for high value offerings and use personal selling
Don’t underestimate customer inertia. As the saying goes: “if it ain’t broke, don’t fix it”, if a potential customer feel something is working for them, convincing them to change can be difficult. Why should they replace a familiar product or service for that of your “precarious” start-up?
This is why entrepreneurs often pick higher-ticket items their where passion and willingness to provide excellent customer service can substitute for a big marketing budget. Very often the business founder is the chief or only salesperson, and they sell directly, usually to other businesses.
If your offering is a higher value product it will more likely sustain personal selling. This will make your target customers more willing to listen, as well as making it worth your while to sell it yourself. If your product has advantages over your competitor’s, your life will definitely be easier when pitching your offering.
Forget about hiring an all-star team
Investor backed startups pay CFOs a six figure annual salary and stock options but if you’re starting with a small budget you can’t afford this. Rather, attract employees by giving them great learning and resume building opportunities. Finding “diamonds in the rough” is challenging, and you can’t always afford to thoroughly pre-screen candidates. You may end up hiring and then firing some people who don’t perform the way they had claimed, but when factors such as, let’s say, personality and common sense are the most important, you can get good bang for the buck with less experienced people.
Control your growth
Succeeding as a low-budget start-up requires that you expand only at a rate that you can control and afford. This means only investing in additional capacity when you need it. It might even mean that you have to turn down orders that are too large for you to fulfill. It’s can be psychologically hard to turn down a large order, but it’s better than accepting it and not being able to fulfill it adequately. Your reputation could suffer as well as any possible future business with the disappointed customer.
Focus on cash
Whenever possible, try to get payment terms from suppliers and quick payments from customers. This will help you manage your cash flow immensely. For example, while choosing between suppliers you can ask for a one time only, 90-120 day terms on your first order. Most may not accept but if only one does, this will effectively buy you time to sell product. In this way, your supplier partially finances your business.
In a venture-capital financed business, it might be possible to start off selling products as “lost leaders” or below cost in hopes of gaining market share or achieving economies of scale. If you’re starting up with a small budget, a better approach is to cover costs and finance growth by focusing on products you can sell at a high margin.
Changing Policies as your Business Grows
Once your business grows, if you want to build it into a durable business, you’ll need to revise or even totally abandon some of your “start-up” policies. Changing the policies that let you get this far can be a challenge, but growth often requires it. Growth also usually means changing your personal role in the organization – a particularly difficult task for many founders is letting go and delegating authority and responsibility.
Eventually, growth will probably require:
- Emerging from your niche and competing with a larger companies.
- Offering less customized, more standardized products or services
- Changing focus from cash flow to strategic goals
- Recruiting more experienced (and higher paid) employees