The single biggest problem for startup businesses is the lack of startup capital. It is very challenging to start a business with few resources. Many experts state that under-capitalization of a business is one of the large reasons for failure.
I started my business with $500. How did I do that? First, I prepared for the event. I planned to draw no income for the first year, so I reduced my lifestyle, increased my savings and built a buffer to handle that early dry period. Next, I focused on getting to cash positive as quickly as possible. That meant lining up customers early. Pre-selling is a technique that entrepreneurs don’t do often enough. I kept every expenditure low. I wanted to prove that the product was going to be successful, before ramping up investment. How did I know if the product was a success? The customers and marketplace told me.
Was it easy at first? No. It was brutal. When the business began to grow, I took out bank loans and used my home as collateral. The business was almost 10 years old, before I was able to able to remove the home pledge from the business loans. I never spoke to a venture capitalist. It took a lot of sacrifice to my lifestyle, but it paid off more than I could ever imagine. My main engine for growth was customers.
The best part about customers is that their only interest is buying your products or services. Customers don’t receive equity or interest on their purchase. So, in terms of capital, selling products and services is the BEST way to raise capital. Banks want lots of collateral; such as your home. Venture Capitalists want very large returns, equity and control. Customers don’t want your home or control of your business. They simply want you to deliver what you promised to them at the agreed price. Make a profit on the agreed price and use that profit to invest and grow your business.
A mentor told me one reason that my business was successful was because I did not spend time chasing capital. I have seen businesses spend all of their time trying to woo investors. The investors become the customer, instead of the customer being the customer. The business owner thinks that capital investment solves all problems. It does not. Profitable sales solves problems better than anything else.
One final thought. Keep your expenses under control. You don’t need the fancy office or car when you start up. You don’t need excess staff or over-engineered products. Managing expenses is a challenge. In start up phase, capital is so precious. Protect it.