Lack of capital is one of the major reasons why startups fail. Some entrepreneurs theorise that raising capital can be a full-time six-month job for CEOs and this leaves bootstrapped startups with very few resources to operate and grow their business in the early stages.
One way to reduce your reliance on capital and throw all your focus on growth is by devising a business plan that requires very little capital in the first place. Here are a few strategies to execute this.
There are two ways businesses make money – they either build a product and make money through licensing or selling it. Or, they make money by providing a service. The challenge with the product model is that it requires entrepreneurs to invest time and money building a product before it can be sold to customers for money. This necessitates large capital investments. A service model, on the other hand, focuses on getting a client first. You only spend time building a product once the client has signed off.
Let us take the example of a startup that wants to make real estate software. Instead of working on the software right away, it makes better financial sense to talk to estate agents to understand their requirements and build customised software for their needs. Once you have gained significant industry insights and have money coming in, you may allocate resources to build a software product.
A lot of capital investment is spent on building infrastructure. This could include production facilities and warehouses. But truth be told, owning these facilities do not make sense until you have sufficient demand from customers. As a startup, you may look at contracting your production to third-party manufacturers. Platforms like Alibaba and Yell can help you connect with thousands of manufacturers and suppliers from around the world.
Renting a warehouse can also cost a lot of money. You may avoid this expense by outsourcing this function to suppliers who offer dropshipping. These suppliers can take care of labelling their products with your branding and can also fulfil shipping so that you may focus solely on marketing your business and growing revenues. However, please make sure that you only choose trusted suppliers with high ratings on platforms like AliExpress since your credibility hinges on your suppliers’ ability to fulfil orders.
Businesses operate in an ecosystem. You are likely to be your customer’s customer in some ways. One way to minimise capital expense is by bartering your products and services with your clients. For instance, if you run a marketing agency, you may offer your services to a co-working space in exchange for free working spaces. This helps you avoid paying a rent in the initial days of starting up. This is also useful when you do not have a lot of experience under your belt. Paying customers look for experience and bartering helps you gain this without spending money on office space.
Eliminate High Cost Equipment
A lot of fundamental expenses in running your startup can be avoided with careful tweaking. For instance, if you do a lot of running around as part of your sales function, you could replace your large car with a small one that consumes lesser fuel. You may also look at replacing a car with a bike that means even lesser cost. Similarly, if you are an online business that does not have to meet clients face-to-face, you may look at moving out to a cheaper area instead of renting space in more central city locations. You may also replace face-to-face meetings with video calls that bring down your commuting expenses.
Thanks to the maturing ‘startup ecosystem’, founders are no longer looked down upon for not wearing an expensive suit or working out of their garage. As entrepreneurs, your primary focus must be on solving your customer’s problems. If capital is the only thing that stops you from doing this, it is important to find all the ways you can to minimise expenses and maximise your focus on fulfilling your client needs.
Thanks to Anand Srinivasan for this article. Anand is the founder of Hubbion, a suite of free business apps and resources.