Monday, August 6, 2012

How to Reduce Your Budget and Reduce Startup Risk

One of the biggest myths I still see in the community of new entrepreneurs is the assumption that “All I need is a good idea, and some investor will give me the big money I need to build the business.” In reality, investors fund good business plans, not big dreams. It’s all in the execution.

A related myth is that it takes a lot of money to start a business. Investment requests of $500K and $1M seem to be the most popular. In reality, most business today can be built and reach breakeven for much less than these amounts, maybe $10K-$50K, with the exception of some medical related ones, and high technology content solutions.

Starting your business with a very low investment is called “bootstrapping,” and these entrepreneurs usually have the most fun. They retain full control of their business, they don’t have an investor “boss” second-guessing their every move, and they don’t have to spend months begging for money. According to experts, up to 99% of businesses are started this way.

Here are some fundamental principles for starting and growing your business with a limited budget, as outlined in a book a while back by Patrick Snow, “Creating Your Own Destiny”:

  • Run your business from the comfort of your home. Even though the cost of commercial office space is down, you still need to sign long-term contracts, make payments up front, outfit the space, and staff it. With a good website built in your basement, your business can look big, and be small.
  • Match your business to your passion. You can’t be successful doing something you don’t enjoy. Passion isn’t really a substitute for money, but if you love something enough, you will find a way to get it done without paying much cash up front.
  • Don’t hire any employees. Managing employees is a whole separate discipline, and most true entrepreneurs aren’t very good at it anyway. Running a business is not rocket science, so you can learn how if you have enough passion. Make sure any employees needed are a function of your “bandwidth,” not your confidence or interests.
  • Build a low-budget plan. This is the opposite of starting without any plan. Operating without a plan is a sure way to spend lots of money. Low-budget also means avoiding businesses that are capital intensive, or even a franchise, which often requires a big up-front investment.
  • Make money whether you are working or sleeping. E-commerce on the Internet is a good example of this. There you can sell your products and services 24 hours per day, seven days a week, on a global basis. Other examples are recurring revenue streams, like subscription fees, or referral fees, or subcontracting where you take a percentage.
  • Minimize inventory, or let the manufacturer carry it. Have you ever wondered who owns all the new cars in dealer lots? It’s not the car dealers. Another example is the Amazon.com model, where they order your product for direct shipment, only after they get your payment. Consultants don’t need any inventory
  • Barter your skills or equity for services you need. An example would be getting free office space by agreeing to be the property manager for the owner. Exchanging equity for services is worth negotiating with legal counsel, accountants, engineers, and even sales people.

Most experienced investors are convinced that too much money is a bigger risk than too little money. Good entrepreneurs can often find a substitute for money, but there is no substitute for time and determination. So keep your eyes and your heart focused on the business vision and the tips given here, and you won’t need a big budget to achieve your biggest dreams.

Marty Zwilling


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12 comments:

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  2. One I would add is being willing to trade time for money. Just like people who play video games often spend time to accomplish missions to gain points to buy new things rather than spending money to shortcut the time required, entrepreneurs can do almost anything themselves. It's like when the entrepreneur doesn't want to get his hands dirty and outsources work; these two aspects run in parallel.

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  6. All these tips are very useful. I think that the most important things for business are planning and thinking, to my opinion, spontaneous decisions can work only when you already have some experience. Teamwork is also very important, ability to work withing a team and co-operate with your team is one of the keys to success. Every start up should remember that it's impossible to avoid all the mistake, especially with financing your business, but it's important to manage a budget and think twice before borrowing money or using loans till pay day.

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