Note: this blog post is an excerpt from my full fundraising book. If you are curious check out my full fundraising book on Amazon.
When entrepreneurs start their businesses, they often have grand plans for those businesses, and those grand plans require quite of bit of money to be realized. But since it is very difficult to raise money, it can be practical to temporarily scale down the grand plans for the business so that the entrepreneur can get started within a reasonable budget that is easier to raise. Once you get started, if you are successful, you will one day grow into all your grand plans that you have for your business. But first thing is first. You must actually get started. It isn’t always possible to greatly reduce start up costs, but it is often possible. Let’s take a look at a few different kinds of businesses and explore some strategies to reduce your funding needs.
The most common instance I come across in my practice where people grossly overestimate how much money they need is when they want to start an online business and think that they either have to spend a lot of money building a website, or if they plan to sell something, that they need to buy inventory upfront. Luckily, both of these types of businesses are very cheap to start. You can create your own website by yourself in just a few days, for nearly free using WordPress. I have a specific tutorial for how to set up your website on your own on my site.
If you plan to sell things on your site, you do not need to purchase the inventory you plan to sell. You can simply sign up to be an affiliate of Amazon.com or affiliate sites like CommissionJunction (cj.com), and resell products made by other companies. If you get credited for a sale, you will be paid a commission. This is a great way to start such a business because you do not need to buy inventory, ship items, handle logistics or returns, or anything else. All you need to do is sell. Once you are able to sell a significant enough volume of products, it makes more sense to consider owning some of the inventory to be able to collect a larger cut of the sales.
Fashion Design And Clothing (Or Other Product) Manufacturing
Another kind of business where people make the mistake of overestimating the amount of money they need to get started are fashion related businesses. Many entrepreneurs starting those businesses immediately want to print a large batch of the clothing they had designed. They typically skip a number of steps. For example, before a piece of clothing should be manufactured in mass, there should be testing of how well that piece of clothing sells. You can do sales on a small scale by setting up a cart or a stand or selling at flea markets in your local city, and trying to sell your products to test which of the items you designed and created will sell the best. If one of your designs sells extremely well, it justifies bigger tests. The problem with printing a large batch of clothing is that if it doesn’t sell well, you will be stuck with a large inventory of clothing on which you spent a lot of money, and which you can’t sell. A similar scenario is true with other kinds of products that you must manufacture. You should test out your sales channels before you take the risk of manufacturing a large batch of products which you have no certainty that you will be able to sell.
As you slowly find which design pieces sell well, and find good marketing channels for them, this can generate enough revenue to fund bigger and bigger batches of clothing that you can print.
I want to share an additional case study. One entrepreneur I know got a job at a t-shirt print shop. That gave him a salary, and the ability to print his own t-shirts (with the consent of the owners). This way he was able to get clothing made cheaply while maintaining two sources of income: his job and the sales of his t-shirts.
It is extremely difficult to start a restaurant and turn it into a success. While there are ways to cheapen the costs, it is almost never cheap to open a restaurant. With this kind of a business it is very important to focus on the extremely high failure rate for such a business and surround yourself with very good advisors who have started restaurants in your area in the past. Don’t rush into starting this kind of a business, but instead try to learn everything possible about owning and running a restaurant. This is one of the most difficult businesses there is, so make sure you know what you are getting into before you try to open a restaurant.
If you do open a restaurant, where you can save money is by buying an existing space where there was a restaurant before. It will save money on costs to create the kitchen, and much of the remodeling. The challenge is that this kind of a business has many different costs and you must be savvy about cutting most of them without cutting the quality of the restaurant.
Service Based Local Businesses
Many kinds of businesses fall into the category of local services. These can be chiropractors, doctors, roofers, painters, cleaners, mechanics, mobile services that come to your home to perform some service, and many other kinds of businesses. They have a few things in common. Before starting them, many entrepreneurs get caught up in the costs of opening an office, buying equipment, remodeling, hiring staff, and registering the business with the state. Not all local service businesses have to deal with all such issues, but many local businesses have to deal with at least some of them.
All local business entrepreneurs face a similar dilemma. They must invest quite a bit of money into their business before they are even put in a position to get their first clients. That is a lot of risk! Plus, getting the money to start the business can take months (or even years) if the entrepreneur doesn’t already have that money. There is one controversial strategy I want to explain that can help many local service businesses (not all) to get around this challenge.
What some entrepreneurs do is start promoting their business without the business truly being operational. The purpose of this is to see if the business can get clients or inbound phone calls. If someone does call and ask to make an appointment, the entrepreneurs simply tell them that the business is not taking new clients at the moment, and that they would be happy to put that potential customer on the waiting list and call them when the business is ready to take on new customers. This controversial strategy helps to take the risk out of starting the business because it lets you explore and build marketing channels until you find marketing channels that will work to consistently bring you clients. Once you find that, you can at least be assured that you will have some client base to begin with.
Again, this strategy is not for the faint of heart. For a variety of reasons, most people would be worried about pursuing such a strategy. I won’t say that I recommend that you pursue this strategy. I will simply leave it up to you to decide whether it is something that makes sense for you to try.
If you want to start a technology business or a software start-up company, you absolutely must follow the Lean Startup methodology by Eric Ries. This is an industry standard, and a way for you to spend minimal company resources while creating the best product possible.
Many first time technology entrepreneurs start with a big vision, and try to launch with that big vision ready to go. As you can imagine, it is expensive and time consuming to pursue that big vision from the beginning. The projects become bulky with requirements, and often never even get launched.
The Lean Startup methodology suggests a very different approach. It suggests that you identify something called a minimum viable product (MVP), and launch with that. Once you launch your MVP, you will be able to put that product in the hands of potential customers, and talk to them about whether they would buy it, and ask why not if they say that they wouldn’t. Once you talk to a number of people and gather feedback, the Lean Startup methodology dictates that you then go back and improve your product based on the feedback you got. Once you product is improved based on people’s feedback, you should show people the new and improved version of your product, and again ask potential customers what they like and don’t like about the product.
This results in many small iterations (or versions) of your product, with each version representing an increase in product quality. This process helps you to quickly evolve and improve your product with minimal wasted effort and minimal guessing of what your customers will want.
Many people love to cook and experiment with food. I encounter many food entrepreneurs, but unfortunately, creating a new food item is an extremely difficult business. Big grocery stores make new food companies jump through large hurdles to get placed on their shelves, and even when they do, they buy items at very small prices while adding a lot of requirements for the food items like fancy and expensive packaging. Small stores simply don’t move enough products to make a big financial impact. Plus they don’t have much shelve space to add your new products. Selling new foods wholesale to restaurants and other companies is another difficult option as you have to start contacting different places and engage in a very serious sales process that doesn’t have a great chance of succeeding.
If you feel that you have a winning new food item, consider selling it on your own, and build a small local following. It will take you a while, but you can do this with organic growth which won’t require you to raise any money. Keep gaining local recognition. Depending on what your food item is, that might evolve into a successful catering business or a food truck business. As you gain local momentum and revenue, it will be easier to raise money if you want to expand your business down the road.
Additionally, if your food product is something that can be shipped, you can sell your food product online through sites that allow food sales, and through your own website. Recall that you should be able to create your own simple but professional website using WordPress.
More On Fundraising: Full Fundraising Book
If you found this helpful, you can check out the full fundraising book. This article is just a section in that book and serves as a nice sample. If you are curious check out my full fundraising book on Amazon.by