Starting a business with limited capital requires a shift in mindset. Traditionally we are conditioned to begin the process of looking for new business opportunities by asking: “Where is there a gap in the market and how can I fill that gap?” A gap could be an unfilled customer need or a new invention yet to be brought to market.
Next, we establish a goal to create a venture that will fill that gap. We consider the resources necessary to make our goal a reality and go out in search of those resources. We write a business plan and present it to potential financiers with the promise of a return on investment.
If the financiers like us and like our idea, they provide us with the capital to start the business. If not, we are stuck.
Most times, people find it difficult to raise the resources they require, causing the entire project to fall on its head. There is an alternative route to creating a new venture.
Instead of starting with the question, “Where is there a gap in the market and how can I fill it?” ask yourself, “What do I have and who do I know?”
Carefully examine the resources and relationships over which you have influence, and consider how you can put these to work quickly and effectively to create an offering that the market needs or wants. You can experiment using different combinations of resources to test how the market responds to different offerings and over time create an offering that is really valuable to others.
With this approach, an entrepreneur’s goals emerge over time, taking resources, connections and contingencies into account.
They are not fixed at the start of a project as they are when the traditional approach is applied. A useful way to contrast the traditional and alternative modes of venture creation is to use the metaphor of the dinner party.
Assume you are hosting a few friends for a casual sit-down dinner on a Saturday evening. In preparing for this get-together, you might spend some time thinking about who is coming and what food they like. You might even call them up earlier in the week to find out if there is anything they don’t eat and if they have any preferences.
Having gathered this information you will decide on a menu, go to a recipe book to see what ingredients you need, construct a shopping list and buy the goods.
You will bring home the ingredients, prepare them according to the instructions and hopefully serve a delicious dinner.
The alternative option would be to wake up on Saturday morning, check what you have in the fridge and freezer, consider what sort of food your friends prefer and concoct something for them with the ingredients that you have on hand.
Developing the alternative entrepreneurial mindset
Here are some principles and guidelines that will provide you with a better chance of effectively launching a business with little or no capital.
1. Start with what you have
At the outset of looking to start a new business take stock of what you have at your disposal. Consider your:
- Skills – what can you do?
- Experience – what have you done in the past?
- Knowledge – what do you know?
- Tangible resources – what do you own and what do you have access to?
It is recommended that you think carefully about your responses to these questions. Go beyond what comes to mind immediately and think a little more deeply about what you have at your disposal. In this process be sure to write down your responses to these questions.
Your written responses will create a collection of artefacts that can be combined to create something interesting, novel and valuable in establishing a new business.
2. Take into account who you know
What you have needs to be combined with who you know for it to have real power. Take stock of the relationships you have with others, map out your network of connections and consider how your connections could enable you to use what you have more effectively.
Sarasvathy points out that the alternative means of venture creation advocates “stitching together partnerships to create new markets.” Relationships, particularly equity partnerships, drive the shape and trajectory of the new venture.
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3. Invest what you can afford to lose
There is a big difference in your mindset if you start with the perspective that “I am investing this amount and I expect a 30% return” versus “I can afford to lose this much, therefore I will put it into the business and see if I can make it work”.
If you have only put in what you can afford to lose, you maintain flexibility in the business and minimise stress in managing it. If you are only willing to invest when you expect that you can get a specific return, there is a strong chance that you may never take the leap and launch the business you always dreamed of owning.
An example of this is the entrepreneur who refuses to leave a well-paying job until he finds an opportunity that he predicts will pay more, versus one who decides to invest a small portion of her savings and two years of her life in a project that she believes is worth that amount of time and money – irrespective of whether it will pay more than what she currently earns.
She is living out the alternative entrepreneurial mindset.
4. Experiment and adapt
With this mindset, flexibility and adaptability are a competitive advantage. You succeed not by becoming too fixated on a single goal or outcome but by being responsive to changes in the environment.
Existing firms typically take longer to adapt than new firms because they have more incentive for things to remain the same and they have established routines and practices that reinforce the status quo.
New firms are not tied to the way things have always been done and thus entrepreneurs can benefit from shifts in consumer preferences, or shifts in technology or changing legislation by realigning their businesses to take advantage of such developments.
As Sarasvathy puts it, in the traditional approach to business planning, “there is an explicit effort to avoid unpleasant surprises”.
The entrepreneur with the alternative mindset, “in contrast, has to stand ready to make do with what comes her way and learn to transform both positive and negative contingencies into useful components of new opportunities.”
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Types of new businesses to start with limited capital
The businesses that emerge when entrepreneurs have limited capital and adopt the alternative mindset for new venture creation typically have certain characteristics. They often fall into one or more of the following broad categories: Service, Events, Performance, Brokerage or Education.
- Service businesses depend on the skill and time of the person starting the business. Such a person can make their skill available to others with relatively little upfront investment. To start a service business you merely need the tools of your trade.
- A consultant may require a computer, a handyman some tools and a dressmaker a sewing machine. With these tools on hand you can use your contacts to start selling your service. Events-based businesses are a little more complex but can still be started with limited capital (see the March edition of Entrepreneur for a feature on events-based businesses). Events-based businesses include ventures that put on sports events, expos and concerts. The advantage of such businesses is that with effective marketing, you can sell the tickets before you incur the major costs, limiting the amount of capital required to keep the venture afloat.
- Performance-based businesses depend on the ability of entrepreneurs to perform and to pull together other people who can enhance the performance.
Mark Lamberti, the entrepreneur who turned Makro into what it is today, says he learned some of his most important business lessons when he played in and managed a band in his young adult years.
Performance-based businesses depend on the creative skill of the entrepreneur coupled with an ability to market those skills to a broader audience.
Musicians, comedians, motivational speakers and singers all have the potential to create performance-based businesses.
Brokerage businesses are amongst the most popular kinds of ventures for people with little capital. They bring buyers and sellers together. You find brokers across multiple industries from real estate (e.g. estate agents), hospitality (e.g. website portals marketing B&Bs), recruitment (e.g. recruitment agents), and sports (e.g, sports agents bringing sportsmen and sponsors together), to speakers and performing artists (e.g. speaking agents marketing speakers to conference coordinators) and the list goes on.
The key to being effective in brokerage businesses is having contacts and fostering relationships and effective marketing on both sides of the equation – to buyers and sellers.
But the essence of the business is still what it has always been, filling an information gap between buyers and sellers. People with lots of contacts in a particular industry and a flair for marketing and selling should consider a brokerage business as a low capital way to get into business.
Education is another area where people find opportunities with little or no capital. Anyone with skills and insights that others wish to learn, and a passion for helping others develop could move into education.
From an ex-teacher setting up a business that provides extra lessons to school-going children, or a sports fanatic setting up a coaching business, to a person with training in photography helping others take better pictures, there are multiple low capital opportunities in the education arena.
Although these five categories of businesses – service, events, performance, brokerage or education – may spark some ideas within you, low capital start-up opportunities are not limited to them.
With ongoing development in technology, there are many new opportunities emerging in the software and web services space (e.g. creating iPhone apps) and in the media space (e.g. with website and blogging tools there is no longer the need to spend R5 million to create the foundations of a media company).
The key is to start with what you currently have – the resources you can access, the skills you can leverage and the connections at your disposal – to help you figure out a low cost path to a sustainable and profitable new business.
The downside of the low capital approach
Although there are many benefits to starting your entrepreneurial journey by asking “what do I have and who do I know?” there are also downsides to this approach which may require remedial action to overcome the negative consequences.
The major one centres on the notion that the business and the owner become inextricably linked – the owner is the business and the business is the owner. Under such circumstances, it becomes difficult to scale the business because the owner only has so many hours a day to keep selling his services.
It also becomes difficult to sell the business because it is worth very little without the owner and there is a risk that the owner may become overworked and burn out.
To overcome these challenges, entrepreneurs should focus on codifying what they do and training others to be able to replicate it. They should also aim to systematise as much as possible in the business – creating systems and processes to do what they would otherwise have done.
The big four accounting firms all started out many, many years ago as small accounting partnerships but they were able to grow because the senior partners effectively trained junior people entering the firm in the ways of effective accounting and auditing and they created methodologies and practices that could be passed from one person to the next to enable a broader base of people to do the required work.
Privateproperty.co.za and Wheretostay.co.za have created value by taking their brokerage businesses online. They are therefore not dependent on the people in the business to make it work. The business can scale and be sold without being tied to one particular person.
Although there is a downside to the alternative approach to entrepreneurship there are also many upsides.
It is empowering to focus on what you can do with what you have at your disposal and it enables people to get into business in ways they would otherwise not have imagined. If you are genuinely serious about creating a business from a low capital base, I encourage you to give it a try.
What Can A Business Loan Be Used For?
Read on below for what you can use these loans for.
Sometimes in the business world, you might need a financial helping hand. This is especially true if you are starting out as a business owner or building your business from where it already is. This is where business finance can be highly useful because you can use it for any number of issues that your business might be facing.
When you apply for any business loans you should know what you want to use the money for. For example, asset financing is used to lease, hire or purchase new equipment or vehicles for your business.
Small business loans can be used to boost your business funds or for purchasing new premises. Interested in applying for business finance? Read on below for what you can use these loans for.
You can purchase inventory
If you sell products, the chances are that your cash flow can often be dictated by having to restock your shelves. But if you have a business loan, you can purchase more inventory to replenish your stock and stay in operation throughout the year.
Purchasing new inventory during seasonal dips, such as selling out of items during the festive season, can become expensive. This is where finance can come in handy. You can have the funds deposited into your company bank account and use it solely for restocking your shelves, allowing better management of accounts during these trying times. It is not a long term solution, however, to use a loan to purchase inventory can be helpful for small businesses just starting out.
You can upgrade equipment
Having outdated equipment will put you at a significant disadvantage to your competitors. This can be remedied by taking out business asset finance in order to upgrade your current equipment. You can lease, hire or even purchase everything you need to maintain your original business plan.
For example, a transport or logistics company can use this finance to improve their fleet, to upgrade their current trucks, or to provide new technology to drivers to help them navigate the South African roads. If you are a boutique design agency, you can use your loan to purchase new computers with the latest software so that your staff is always on the cutting edge of all trends. On your loan application, be sure to list what you plan on using the money for so that you have accurate estimations of your interest rates.
Keep your office operational
Keeping your office operational means that you need to pay for day-to-day expenses. This can include anything from replacing an old coffee machine so your staff stays caffeinated to paying the utility bills so that your office does not go dark when you need electricity the most.
This could be seen as starting capital for small business owners, which you can then supplement with more income or repay once your business starts to earn more and become successful. You could create a list of all of your needs, such as paying lights and water bills or fixing kitchen equipment and look for those that you need to focus on the most. For example, your staff could bring their own lunches into the office in case you need to replace the fridge or you could strike a deal with a nearby coffee shop to save yourself from spending unnecessarily on expensive coffee equipment.
You can boost your marketing budget
Marketing is not easy to understand for everyone. While you might have a brilliant business mind, your aptitude for selling and marketing your company might not be your strong suit. This can be helped by investing a business loan into a marketing company for your strategy, which can help build awareness about your business and make it a success.
You will have improved brand visibility and can reach customers in new and exciting ways. And you will also see a significant return on investment when reports and analytics come in showing your business’s performance. Marketing is an integral part of building a flourishing business, so using your loan for this purpose would not be a waste. Be sure to speak to your lender about whether this is an acceptable use of your business finance and what the interest rates would be.
A business loan can be a sound investment, especially if you consider what it can be used for. You could look into purchasing new inventory for your shelves during a busy shopping period, or upgrade your machinery for your next big project. You can use the money to keep your day-to-day expenses from becoming overwhelming or boost your marketing budget so you can reach customers and build your business.
Does Your Business Really Need Funding?
Strategy, risks, and opportunities.
Businesses need capital to grow, and most small enterprises rely on external funding to meet this requirement. While accessing funding can be challenging for entrepreneurs, taking on the financial commitments of a loan should never be taken lightly. Many small businesses fail because repayment conditions are so onerous they impact cash flow, and business owners end up blacklisted, which dampens their future prospects.
First, ask yourself some hard questions
Before you decide to apply for that loan, cash advance or capital injection, make sure that your business really needs funding. Critically evaluate your business. Consider that you’ll ultimately need to give something back for that funding – an equity stake, or interest payments.
Determine how much the extra funding is worth to you, and what would happen to your business if you couldn’t get it.
Define your goals
The type of funding you need (and how you validate it in the application) is dependent on your short- and long-term goals. If you’re not currently on track to achieving your business objectives, determine what stumbling blocks or pain points are holding you back. Ultimately, you should be certain that the capital will help you achieve your objectives.
Evaluate your financial pain points
Next, determine which of the identified obstacles can be overcome with extra money. While most could, a loan may not be the answer. Entrepreneurs often use financing to temporarily plug holes, instead of fixing them. Without addressing the root cause of the issue, the business will continue to struggle, while also dealing with the extra debt.
It is also important to consider the nature of your requirements, and the impact this will have on finances. For instance, using a loan to hire more staff requires upfront funds before additional revenue can be generated. The same applies to sales and marketing initiatives.
Expanding your footprint as part of a strategic plan to grow your business also requires funding, but these are usually long-term loans that take more time to pay back. A thorough evaluation is needed to determine the potential return on investment and compare it to other opportunities.
Evaluate if the strategic benefits will outweigh the mid-term cash flow risks.
Consider your options
Before making any financial commitment, first look for ways to optimise your operation to realise cost efficiencies within the business that can free up working capital to fund the fix.
If you determine that funding will address your pain points, by boosting inventory ahead of a seasonal spike, for example, consider vendor financing or supplier credit options before securing financing from a bank.
If you need to expand the business, look for ways to lower the associated costs. For example, franchising a new location to a competent partner can relieve you of some of the financial burden. A product-based business could perhaps generate extra income by selling via online channels, or through distributors or other retailers instead of a new store.
However, should you choose to proceed, before you sign any loan or credit agreement, make sure you consider all possible scenarios:
- How long will it take before your investment starts covering the costs of your loan?
- How will you manage repayments if your forecasted growth doesn’t materialise?
- How can you pivot to reallocate resources if your plan is not working out as initially intended?
The bottom line
Before you start looking for funding for your business, critically evaluate if your business really needs it. If you decide capital is necessary to reach your goals, and you’re willing to take on the responsibility, carefully consider the type of funding that is best for your particular type of business and your specific needs.
How Investors Choose Who To Invest In
Why entrepreneurs tend to focus on the wrong things when pitching to investors, and what investors are really evaluating instead.
The hypothesis of my book Lose the Business Plan was that great businesses are not determined by Excel spreadsheets and the all too predictable J-curve, but rather by the entrepreneur or entrepreneurial team and their ability to see opportunity, navigate obstacles and make things happen.
The truth is that entrepreneurs focus on the wrong side of the coin when meeting with an investor. They focus on the deep detail of the business plan and concentrate on justifying assumptions, predicting and overcoming objections, and emphasising market potential. Yet it’s my experience that the real decision on whether or not to invest in a company is more heavily weighted towards the entrepreneur or team rather than the business plan itself.
Once the ‘numbers’ stack (in other words, the business model makes sense) and the risks have been considered and appropriately mitigated, then the real decision-making can begin. The final decision comes down to four important characteristics of the entrepreneur himself or herself.
1. Is she honest?
You may have the best business plan in the world and you may have mitigated every possible risk but, if you are not someone the investor can trust, no deal will be made. I find that entrepreneurs often underestimate the importance of their reputations and, in today’s connected world, it’s so quick and easy to reference someone’s character.
Entrepreneurs who think about the short game and make morally questionable decisions for the prospect of quick profits generally find themselves in an ever-diminishing circle of people who will do deals with them. Your reputation is everything and you should guard it at all costs.
2. Does she work hard?
I am still not resolved around the cliché that you should work smart and not hard. (Perhaps I missed the memo or was asleep during the lecture that demonstrated how this is possible.)
In a world that is changing at an astonishing rate, in an economy that is becoming more and more competitive and in a business environment that is becoming ever more complex, it’s hard work to remain relevant and ahead of the curve for any extended period of time. Every quarter sees a new trajectory that needs to be investigated and navigated. In my opinion, this requires not just smart work but hard work, too.
It’s certainly true that investors like to invest in entrepreneurs who will take their investment seriously, who take their businesses seriously, and who are on top of their games.
3. Is she smart?
Smart does not always mean book smart but it definitely means street smart. It means having the ability to read a room, to see an opportunity, to learn new skills quickly and also being able to apply new learning’s to the business.
Investors look for investees who show agility when adapting to feedback from the market, from their competitors, from their staff and more.
4. Is she ambitious?
Investors do not like investing in ‘mom and pop’ operations. They seek the highest return on investment and that comes from businesses that can scale profitably. Scale is always relative to the investor’s perspective and not your own.
An investor with a couple of hundred thousand rand to invest will have very different expectations of the size of business he or she would like to invest in compared to another investor who has tens of millions of dollars. It’s important for the entrepreneur to authentically resonate with the level of ambition of their prospective investor, and be able to express that ambition through a coherent and cogent vision, as well as a plan to achieve that vision.
Remember, no one starts out as the ideal investee. It’s something that is built up over time and requires constant maintenance and curatorship. It’s essential to continually work on your reputation, to ensure that you are up to date with your industry, and to reassess your level of competence in your market. This is the only way to make sure you become and remain an ideal investee to a potential investor.
Read next: The Investor Sourcing Guide
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