So you want to be in business for yourself but you have little or no cash to put up as capital. You are well aware that the funding options for start-up businesses are severely restricted; you may even have heard that only about 3% of people looking for substantial outside funds to launch a new venture ever raise the capital they require. So what do you do?
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.
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.”
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.
Many modern brokerage businesses – such as Privateproperty.co.za and Wheretostay.co.za– now leverage the web to create a broader reach between 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.