One of the greatest reasons for not starting a business is related to the lack of capital. According to a Selz.com 2015 report on side businesses, the principal criterion stopping people from running their own company is, by far, the funding, with 40% of people mentioning it as their main bottleneck.
But I’ve good news for you, guys! There’s a reason why Build Your Dream Company has in its slogan:
“How to create a business with no idea, no expertise, and NO MONEY.”
Yes. You can, indeed, start a company with a minimum amount of upfront investment, and sometimes with barely any money at all.
I’m not talking about dubious schemes. I’m talking about executable, sustainable, and even sometimes profitable ways to start your own business.
So, let’s get started. Here’s our agenda for today:
- How to create a business saving 95% of upfront investment
- How to develop a technological solution for free
- How to fund your business the right way
SAVE 95% OF UPFRONT INVESTMENT
#1: Going Lean
First of all, I want to tell you that a big chunk of businesses can be created with a “Lean” mentality.
But what does that really mean?
It means that you’ll streamline – or squeeze – your idea up to a point in which you have a basic Prototype or a Minimum Viable Product (MVP) that doesn’t require you to invest like you’d normally do.
Squeezing a product (it’s a much better term than MVP, I must say) is, above all, a matter of creativity.
You have to think differently and break with some of the standard conceptions that you have. It requires you to question the way you’re thinking of building the business and becoming obsessed with reducing the investment required by approximately 95%.
But how do you do that?
First, the marketing:
You must deeply understand who is your customer. What does he really value? What are his burning pains? And, obviously, where can you find him?
And then, you think backward:
When you have all these information, you’ll be able to think of several ways you can solve the customers’ pains – depending on your level of creativity – that go way beyond the single solution that you initially thought. It doesn’t mean that your idea is useless, not at all! It means that sometimes we’re absolutely sure that there’s only one way to solve a given pain, but that’s not entirely true because you can come up with different angles and different products, or at least different versions of your initial product idea.
You see, if you think backward starting from the customers’ difficulties, instead of focusing only on developing your initial idea, you’ll, at the very least, understand what are the key features in your concept, those that really move the needle for the customer.
I’d also like to add the following, when it comes to investment:
The Pareto Principle (80/20) tends to apply here too.
So, when you really go beyond the “standard” thinking, you’ll find out that the big chunk (more than 90%) of your total investment will be based on things that don’t exactly move the needle; expenses that the customer doesn’t really value that much, or doesn’t miss them when compared to what’s absolutely core.
Perhaps, those expenses are necessary to run the operation, but there are always ways to cut on those costs at an early stage.
I think it is relevant to share my own example.
I believe you don’t know that when I was creating my first startup – Walkamole –, we had this first raw idea of creating an international food chain like Chipotle, but in shopping malls.
Do you know how much it costs to set up a store in a shopping mall – with the transformation of the place, the equipment you have to buy, the redesigning materials, etc.?
It costs, on average, €200k. Oh, yeah, €200k. And, of course, if you imagine a McDonald’s store, the construction and equipment expenses range from €955k to €2.3M.
Now, what are the odds that some first-time entrepreneurs without family fortune whatsoever have €200k in their pocket?
Not that likely, right?
And what were the odds an investor would lend us the money when we had no experience and no track record?
Below zero, I’m sure you agree.
So, yes, we had to go Lean.
We’ve decided to start in the Street Food channel.
By starting in this channel, we were still creating a Burritos business – so the core features that move the needle were still intact – but the infrastructure needed to run the business was 95% cheaper – an investment of €10k compared to €200k.
You see, this is how much you can save by going Lean. A simple decision that made a world of difference. All you need is the capability to think outside the box (what a buzz expression, I know…) because often the answer you’re looking for does not fit with the traditional way the society works.
#2: Avoiding Fixed Costs
Still in the “going Lean category”, there’s one more key point I’d like to share with you.
You see, I’m a huge fan of business models built upon variable costs. Those are the types of businesses that you run with minimum risk.
I never recommend my students to go BIG at the beginning, for a couple of reasons:
- It’s not the way how amazing businesses are built. In spite of what you might think, the vast majority of the best businesses doesn’t start big, they don’t start with the big flashes, and on the cover of Time magazine. A great business is raised from the ground, it is built with passion and by working out the details, and it usually grows organically, with time. Because that’s precisely how human trust is also built – it takes time.
- It stupidly increases the pressure upon the founders’ shoulders, to know that they have so much money to spend on infrastructure and advertisement, so they feel forced to do EVERYTHING, which eventually leads to a waste of cash and a mediocre level of communication effectiveness.
- It will be harder to run a heavy infrastructure business for someone who has never managed a company before (sales people, marketing, hierarchic structure, processes, etc.). One of the reasons why you should start small is because that way you have enough room and space to learn.
Now, let’s get back to the importance of starting with variable costs.
If you’re not familiar with management verbiage, let me tell you that typically firms have two types of recurring costs:
- Fixed costs: Stuff that you have to pay every month independently of selling. Things like salaries and rents are the typical examples of fixed costs – and salaries usually amount to 90% of total fixed costs.
- Variable costs: Sometimes they are called production costs, while other times they are Cost Of Goods Sold. Both ways mean the same – the direct costs incurred to sell a product. As an example: to sell a steak dish, you have to buy meat, vegetables, potatoes, spices, sauces, and to know the variable cost of selling this dish, you must calculate how many grams of each ingredient you have on your plate (on average) and how much it costs. Let’s imagine that you sell a stake for €10. If all ingredients cost you €3, it means your variable costs are 30% of the price, and you have 70% operational margin.
Ok, so now that we’re aligned in what variable costs mean, what I want to tell you is the following:
While in every business you’ll always have variable and fixed costs, the fact is when you’re starting, many times you don’t need to incur the fixed costs from the get go.
In fact, my humble recommendation is that by using your creativity and outside-of-the-box thinking, you find a way of cashing out money ONLY when you sell.
That probably means that your cost PER UNIT will be higher in the beginning because you’re paying to mitigate the risk. But that’s OK if you start with a slightly superior unit cost, as that allows you to validate the concept and the initial version with no investment.
A final example of starting with a variable costs’ business model instead of having fixed costs.
You want to create a business that delivers food at people’s home. Your company will pick up ready to eat food directly from the restaurants and will take it to customer’s home or office. You can either start this business by having your own courier – to whom you pay a salary – or you can reach out to a firm that already does this service, and you pay them a fee per each delivery.
What I want you to understand is that when you already have volume, it will always be cheaper to have your own couriers. You pay a salary and each delivery costs you like €0,30. But when you’re starting out and you don’t have volume, you won’t mind paying €1 per delivery, if that means that you only cash-out when you’re actually selling. It mitigates the risk, while if you have to pay a salary at the end of the month, you know that independently of selling or not, that salary must be paid.
I hope this isn’t overwhelming, but if you have any doubt understanding this concept, please email me at firstname.lastname@example.org.
DEVELOP TECHNOLOGY FOR FREE
If you have a specific idea but you don’t have the money or the technological know-how to get it done, there are two specific tactics you can use to develop the product without investing.
#1: Finding an equity partner with technical know-how
Definitely one of the best ways to fund your business is my finding the right partner.
You cannot imagine the number of people I’ve seen doing this.
So, let’s assume that I’m a sales guy, I have no technological knowledge whatsoever. But I had this great idea for an online platform.
First of all, let’s ignore for the sake of simplicity the fact that you should ALWAYS validate and research your idea before you actually start developing it, otherwise, you might waste months of your time in creating something that no one wants.
Back to the point: Assuming that you know there’s a need for this software platform, but you have no way to code it by yourself or pay someone to do it, one of the two big options you have is looking for an equity partner.
This partner can easily be found in freelancing platforms such as Freelancer.com. And, also, it turns out that every country has one or two national online platforms for freelancing or job posting that you can use for this purpose.
Just head over to a website where you can place the following ad. This is a mere example that I could use:
“I’m looking for a full stack software engineer or web developer who can build this platform – explain the platform in detail – which covers the following market need – explain the market need in detail.”
Then, you must end with a really catchy call-to-action that shows that you’re committed and that you’re looking for the best option, and not some random guy without the proper knowledge or drive.
My two cents:
“If you have what it takes to develop this platform and if you’re looking to have an impact and to change people’s lives, send me a private message and I’ll be happy to share with you half the business’ equity.”
Here, I mention “half the business’ equity” but it can also be like 40%, 30%, or even less. However, there are reasons why I suggest you use a 50-50 partnership:
- I’ve seen a lot of successful entrepreneurs doing it precisely this way.
- Giving 50% of equity shows that you’re willing to trust the developer and that his role is as important as yours.
- You want to have the developer absolutely committed to the business. If you give him only 10%, he won’t feel like this is his company. Giving the same equity that you have is the best way to show HOW MUCH you value his contribution and that his job’s quality will highly impact the likelihood of success.
#2: Having the customer paying upfront
This is definitely my favorite technique.
So, here we will have a slightly different approach than the last example.
Instead of starting up with a concrete idea for your business, now you’ll start with a blank sheet of paper.
You won’t have any specific piece of software that you’re looking to develop. Nope, you will get this information directly from your customer, ok?
And the way you withdraw this information will be the precise way you’ll use to sell him the solution.
Here’s how it works:
- First, you select an industry with which you’re familiar with or a business sector that you highly enjoy.
- Then, you list some of the small / medium companies in that sector, and you start contacting them for a small “consulting” chat. You can present yourself as someone who solves problems. It sounds vague, but if you make it sound catchy, I’m sure it will be appealing to a lot of companies.
- You get your first chat with a potential future customer.
- During the conversation, you focus entirely on making questions. Dig deep into his burning pains, make sure you understand what are this person’s real difficulties on a daily basis. And, above all, what’s the main problem he’d like to see solved?
- Now, the interesting thing is that a lot of times, the client doesn’t know the solution to his specific problem. So, here’s what you need to do: as soon as you clearly understand his pain, you want to describe it IN DETAIL to the customer. You know why? Because when you highlight the problem better than the customer can do, he will immediately think that you already have a solution. It is a psychological behavior; he can’t help it.
- And then, all you need to do is ask him if he would like you to develop a specific software with the following features (really list three main features that cross your mind) that would definitely solve his burning problem.
- Now, your trade coin is the following: if they fund the development, you agree on having them using your software for free in perpetuity. This is what you give the company in return for helping you. And trust me, if the software is really a painkiller, there’s a high chance this company will fund the development, or at least help you in some effective way.
- You see, this is the typical “TAKE MY MONEY!” situation. As soon as you can perfectly understand someone’s pain and you offer him a solution to that problem, the price will become a triviality.
It isn’t necessarily simple and linear, but this is how you have your customer funding your business.
Important note: this technique only works for small businesses and, specifically, if you talk with the small business owner. People in large corporations won’t go over the hundreds of internal processes and approvals.
If you want to detail this technique, I highly recommend you listen to Smart Passive Income’s podcast #46 with Dane Maxwell, in which he explains, step by step, how he executes this tactic.
HOW TO FUND YOUR BUSINESS
#1: The “Friends, Family and Fools 2.0” method
Do you know the expression “Friends, Family and Fools”, right?
Well, I have a whole article about this topic called How to Borrow Money From Friends and Family to Fund a Business.
But now, we’re introducing a new version: the 2.0!
A big improvement to what we’ve been discussing in the past that relies on an interesting upgrade. I’ll create some suspense because we first need to recap the key guidelines to correctly raise money from friends and family.
Rules to have in consideration when borrowing money:
- Make sure the lender does not need the money
- Inform the lender that he might lose the money – make sure he understands
- Update the lender periodically and be crystal-clear
- Return the money ASAP
And the version 2.0 appears precisely on the fourth point – Return the money ASAP.
So, you might wonder, what exactly is ASAP? – besides meaning “as soon as possible”, of course.
Originally, when I thought about this, I’d say that your objective was to return the money as soon as it was possible to you. However, the notion of “when possible” varies a lot according to people, don’t you agree?
I mean, while for you investing the profits in your company might be a must, for me it might be secondary when compared to returning the money to our lenders.
So, I decided to recommend a strict policy.
And this policy is:
From now on, whenever you raise money from friends or family, you should (or MUST) agree with them that the first profits that you make will all be directed to pay your debt until the last nickel.
Does it make sense?
So, instead of hoping to give them the money back only after 3 or 4 years or, perhaps, never -, your business’ first profits will all be redirected toward the payment of your debt.
And ONLY then, you start reinvesting your profits into your business or withdrawing some money to yourself.
And there you go, this is the ultimate way to ask your friends and family for money, so you ultimately avoid these folks to feel like Fools. I don’t want you to have any relationship issues with your closest ones, that can easily entangle you.
A side note about getting a Bank Loan or a Credit Line:
I won’t dive too much into these options because, generically speaking, they are usually pretty bad paths.
First of all, it seems to me that banks aren’t that open to lending money anymore. It depends on the economic cycle, I guess.
But, here’s the thing: either a bank loan or a credit line mean that you’re getting yourself into debt to start a business. And I honestly couldn’t think of a worse way to begin a company, if you want my humble opinion.
The last thing you’ll want is to have even more pressure to generate money to pay your debts. You see, frequently our projections end up being way too optimistic, and it takes us a little longer than we expect to generate revenues and having a profit.
So, my humble two cents are:
Don’t build a business model based on credit and, ABOVE ALL, do NEVER, ever, ask for a personal credit line. If you’re decided to take a bank loan or ask for credit, do it always in the name of your firm. I employed one guy once that still had a 10-year personal debt from their previous business and he barely could pay his rent. It’s one of those mistakes that I advise you to run from.
#2: Angel Funding
A third option is reaching out to a Business Angel (BA) to fund your business.
Now, don’t get me wrong here, this really won’t happen just because you snap your fingers.
Let’s start by WHERE can you find Business Angels, or any investor, for that matter:
- Events, startups and investment summits
- Incubators and Accelerators
- Network of contacts
- Social Media and Investor’s Website
I would highly recommend the first two options, namely the first one.
If you can afford a ticket to a major summit, it would be excellent because you can really meet a lot of people in these events. And I’m not talking about being a monster in networking or going with a pool of 10 guys you already know.
Nope, I’m talking about going alone and genuinely asking individuals just like you what they do and how can you help them.
All from a sudden, you realize that you’re talking to a lot of people from the entrepreneurial ecosystem and not only you’re presenting them your concept, you’re also receiving important advice and bridges to further connections.
You know, these events are all about networking. Oh, and please, remember to having a business card with you! 😉
Secondly, if you don’t have money to go to one of these events, I’d highly recommend reaching out to incubators. These entities usually have a pool of really well-connected individuals who can help you getting in contact with the right investors. Besides, they can also help you entering one of those major investment summits without even paying (or at a discount), which is great! And they will also help you with business advice, of course.
Now, let me give you some hints we usually share with startups:
- In a pre-seed round, we usually expect the startup to ask from 75k to 250k – it depends on your situation, but just to give you a rule of thumb.
- NEVER accept to give more than 20% (max. 25%) of equity, or you might screw the cap table for future investors – if you have any questions about this, feel free to email me.
- And this is what investors look in startups:
Team traits: Attitude, Determination, Commitment, and Flexibility.
Know-how composition: do you have technical and business development knowledge?
And the business model type of questions, of course:
- Product: what are you selling?
- Differentiation: what makes your product stand out?
- Costs: what types of costs will you have?
- Competitors: who are your competitors and how’s the market segmented?
- Revenue streams: how do you expect to make money?
- Channels: which channels will you use to reach your target audience?
- Partners: which are your key partners or?
- Key resources: what are the key tasks and resources that you need to have success?
- Financial estimation: how do you expect the business to grow?
- The two main mistakes startups do when addressing BA’s are:
- Addressing them in the wrong timing
- Having a poor pitch
I’d highly recommend you give a check on the article called Business Angels 101: Key Basics to Fund Your Business so you can understand in detail all these points.
Finally, I want to show you the script you can use to convince an investor that you have a profitable business.
So, let’s imagine you’ve been gathering data from your concept’s performance for some time, and you know you’re ready to prove that people are willing and eager to buy your product.
Here’s the exact logical argument you could use when talking to a BA:
“From the people who entered my website from a Google Ad (at a cost of €7 per click), 2% clicked on our PRE-ORDER button. That means that my customer acquisition cost is €350 through online advertisement.
Then, I estimated that my typical customer will pay €20 per month and will stay with us for 5 years, which means that my customer lifetime value is €1200.
So, if my operation costs to serve this customer amount to €500 during his lifetime, then it means this is a profitable business, at least in the present market conditions.”
That’s how you show that your concept has traction and can be turned into a business if the investor is willing to help you.
It is just an example; you can find multiple other ways of presenting what we usually call the “Business Case”. What’s important for you to retain is that you MUST find a convincible story that you have people eager to buy your product before you address any investor. No one will invest in an idea, per se.
Thanks for reading!