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.
Are You Struggling To Find Financing For Your SME? Try Alternative Finance
If you don’t qualify for traditional funding or if it isn’t the right fit for your SME why not explore alternative funding? We specialise in alternative financing options by providing in-depth and custom plans for you and your business needs.
- Call: 011 886 0922
- Visit: www.spartan.co.za
Alternative Finance is finance beyond the traditional – it is defined by the financiers’ area of specialisation – by what they specialise in, whom they serve, and how they provide their funding. It does not replace traditional finance but rather functions as a complementary and additional form of funding.
Alternative financiers are specialists – they focus on a particular need and on a specific audience. As a result their ‘how’ is customised to deal with their chosen target market and for this targets unique needs. This applies to the funder’s processes and to their level of flexibility around things such as collateral.
An example of this is that a SME may have an existing R1 million overdraft (their traditional finance) secured by R 1.5 million collateral but suddenly they need R5 million for some kind of contract or bridging finance – they need it fast and don’t have that extent of collateral.
The traditional funder cannot provide what they need, their process is too long and their flexibility is too low. An alternative financier providing bridging finance and specialising in SMEs is ideally positioned to fill this gap.
One of the most significant differences between a traditional funder and an alternative financier is in their process. In the case of the alternative financier, they have often chosen to deal exclusively with a particular customer base, for example SMEs. As a result, this funder has both an affinity and contextually relevant empathy in working with SMEs.
Not only do they speak the same language the funder also has an appreciation for the time and material constraints of the SME and has developed their processes to cater to this market. This applies most notably to the turnaround time of the funding need and to the assessment aspect – where flexibility around things such as collateral is vital in making the finance happen for the SME.
A traditional funder is unable to meet the deadline of a bridging finance need, submitted on an urgent basis, where the finance is needed as soon as 2-3 days from time of application. A specialised or alternative funder is able to do exactly this. A traditional funder is also unable to find creative methods in solving the SMEs lack of high-value collateral in applying for finance.
This SME has generally already used their high-value collateral for traditional credit facilities but now needs funding for growth or resolution of a temporary cash flow challenge. An alternative financier is able to look at such an application in a different way, and has most likely already established alternative ways to make this happen for the SME.
Ways To Raise Capital To Expand Your SME
John Whall shares some of his insights about raising capital, despite tough economic conditions.
Times are tough, we all know that. As revealed earlier this month by StatsSA, South Africa is in a recession. But as history tells us, recessions don’t last forever and as a business owner you need to stay focused and continue to look for ways to grow your business, because business growth means economic growth.
John Whall, CEO of Heartwood Properties has been in the business of commercial and industrial property development for many years. He has experienced more than one recession in his professional career. In order to expand, companies can raise capital in two main ways, through debt or equity. Debt involves borrowing money, while equity means to raise money by selling shares in the company.
Whall shares some of his insights about raising capital, despite tough economic conditions.
Bank funded expansions are a very common option for many SMEs. The one thing you must consider is that it could limit you in terms of how much you can borrow based on your credit history and available assets. You will also be liable for repaying the full loan plus interest. Right now, interest rates remain the same, but it may increase in 2019. Debt if used correctly and not to aggressively is a great way for SMEs to grow and expand, however debt should always be used conservatively and the business owner must ensure that the cash generated by the business can easily repay both the interest and the capital to the bank.
The South African government supports a number of funding programmes to encourage the growth of small, medium and micro businesses in South Africa. You can contact Department of Trade and Industry (DTI), SEFA, NEF, Khula Finance Enterprise.
Used in the startup phase mainly, this form of financing uses your network of friends, family or acquaintances. The Internet is used to spread the word about your campaign to reach larger amounts of people. Equity-based crowdfunding has become a popular alternative for startups who don’t want to be dependent on venture capital investors. This has proven to be very effective in developed markets.
If you require more capital than you can raise or borrow yourself, and you want to avoid aggressive debt funding then you may want to consider equity funding. This can open up a number of avenues that will offer you capital to grow your business. Very popular amongst startups are angel investors and venture capitalists.
Angel investors are people (business owners) who contribute their time, expertise as well as their own personal finances and in return expect to own a share of your business and receive a share of any future profits.
The opposite are venture capitalists and private equity investors, who are investment companies or fund managers who provide very large sums of cash in return for part-ownership. These type of investors do usually have a say in the management of the business and also agree to a five to seven year exit plan for their investment. This type of funding suits a business who needs a once off equity investment, but does not continuously need to raise capital to grow the business. The election of the investment partner is critical for the business owner and their medium to long-term strategy for the business must be aligned.
Established businesses usually do a public listing to raise ongoing capital in hope of expanding. Not only does this help to strengthen their capital base but it makes acquisitions easier, ownership more liquid for shareholders and allows the business to continuously raise capital to grow. Up until two years ago, the only option for a company to list publicly was through the Johannesburg Stock Exchange (JSE), which required a minimum capital amount of R500 million for a primary listing.
In 2017, the Financial Sector Conduct Authority (FSCA) issued four new exchange licenses in South Africa, all of which are already operational, which is not only providing an alternative to the JSE but is also offering opportunities to smaller businesses and driving down the costs of listing and share trading. One of these new exchanges is the 4 Africa Exchange (4AX) whom Heartwood Properties is listed with. They are the only exchange apart from the JSE which is licensed to trade across all asset classes, including both equity and debt as well as special-purpose vehicles and real estate investment trusts.
4AX is ideally suited for unlisted companies with a market capitalisation of up to R10 billion wishing to list. This, however, is not to say that this is a ceiling on the size of the company seeking a listing. The exchange has aimed to make the listing process more streamlined and timely while fully complying with its licence and the prevailing legal framework. Its listing requirements are less onerous and more cost effective than listing on the JSE, making it a viable alternative for smaller and medium sized companies. The other exchanges to consider include: ZAR X, A2X, and Equity Express Securities Exchange (ESSE).
Why Your Start-up Should Skip The Seed Round
Don’t tell your frugal grandpa, but these days, you can’t do much with the typical $2 million seed round.
When enterprise cloud start-ups meet with us, one of the first questions we ask is: How much capital do you need?
The companies we meet with are typically pre-product with small teams, around two to 10 people. They almost invariably say they need a $2 million seed round, for the simple reason that, today, just about all seed rounds are $2 million.
Our next question is: What can you accomplish with $2 million? If they’re honest, they’ll say, “Not enough.”
We then tell them that we agree. In our experience, $2 million is a little light. At this point, more often than not, they’ll breathe a sigh of relief and say, “Yeah, by our calculations we really need $5 million to get to the next stage.”
So, this raises the question: Why even raise a seed round?
Don’t tell your frugal grandpa, but these days, you can’t do much with $2 million – not in the enterprise cloud realm, anyway. These companies are attempting to build very important products for the enterprise. They are trying to solve weighty problems for business, and getting to their first product offering requires the help of experienced, high-quality engineers who (news flash) do not work for free. There are also early sales and marketing challenges that these start-ups need to get right.
And yet, so many start-ups are still stuck on the $2 million seed round. That’s what the market expects, so that’s what they’re conditioned to ask for – instead of the larger amount that they really need.
We need a rethink here. In fact, there is no longer a Classic Series A market. That’s because the capital requirements for today’s enterprise cloud companies are a lot different than they were 15 years ago, when cloud companies first burst onto the enterprise computing scene.
In theory, new cloud companies need a lot less capital to get off the ground due to lower upfront startup costs, cheaper technology and a wider range of distribution options. OK, fine. But it’s still hugely important to get the right pieces in place and build a solid foundation. And no matter what anyone says, that does not come cheap.
So, how much is the right amount? For early stage cloud business application companies, we believe the real capital requirement is about $5 million. That’s how much you need to hire seasoned executives, prove out an acceptable level of customer success and really start to refine your customer-acquisition model.
But here’s the other problem: The traditional Series A firms are now so large that they need to put much more money to work – a minimum of $10 million. So, that sweet spot between $2 million and $10 million is not really being addressed in the venture world.
And it needs to be addressed. Today you have that headless syndicate of $2 million to $3 million seed rounds composed of 12 different angels and a few seed funds that have already invested in 70 other startups. This is not a great situation for startups. After all, most of these investors aren’t signing up to provide hands-on advice or help with the hiring of key employees.
Plus, $2 million is just not enough capital to build out a product and team that’s ready for prime time. For enterprise cloud startups, the seed round is simply not that effective or efficient.
So, what’s the solution? My advice is to simply skip the seed round.
That’s not to say there isn’t a place for seed funds and angels. Of course there is! In fact, as a managing partner at a Classic Series A firm, I welcome these investors, because they can play a critical role and add extremely complementary value to the Classic Series A syndicate.
At the same time, they also understand that $2 million is not sufficient for today’s cloud startups. We want leading seed firms and value-added angels to join us as co-investors so they can avoid the headless syndicate syndrome and help provide cloud startups with the capital the really need.
Related: 10 Tips for Finding Seed Funding
The reality is that today’s venture capital market is not really optimised for early stage enterprise business companies. At one end of the spectrum, seed investors are not in a position to provide the long-term capital or board-level support that startups need.
At the other end, traditional venture firms have grown in size and have raised progressively larger funds. As a result, they are looking to write bigger checks of $10 million and above. That means they require startups to have a considerable level of traction and be further along in their development before making an investment.
This is why we need a return to Classic Series A investing.
What the market really needs are venture capital firms that are truly built for early stage investing, and that are led by seasoned operating partners who themselves have been entrepreneurs, who are connected to the top players in the cloud market, and who can provide that kind of insight and advice needed to build global, category-leading companies.
More than ever, enterprise cloud companies need honest-to-goodness Series A investors that can help them accelerate growth and maximise their true potential.
This article was originally posted here on Entrepreneur.com.
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