Very often I hear folks share their fantastic business ideas with much enthusiasm. For a split second, it feels like I’m already living the reality of the dream being shared. The ideas are so valid and it’s almost like this product/service should have been rolled out like yesterday. With so much excitement I then ask “have you started yet?” He/she blurts out “I don’t have capital” or the common one “there’s no one to lend me the money I need to start” “I couldn’t get a loan from the bank”… More often than not I wonder to myself: Is that a valid constraint?
It is interesting to note that research findings state that 70%-90% of venture backed startups fail within the first three years. This implies that on the average, one out of three startups that receive startup funds from investors fail in the first three years. Another 70%-80% of small business fail to deliver on projected Return on Investment (ROI).
The statistics increases when you factor in businesses that fail to meet declared projections in terms of revenue growth rate or date to break even on cash flow. Even more fascinating is the fact that these funds are offered with single digit interest rates which is very fair compared to the double digit interest rates in this part of the world.
Yet, we still have such alarming failure rates. Now does this mean receiving capital from external sources invariably ends up in failed businesses? Maybe not. But what the statistics show is that it doesn’t take huge funds or a winning business plan to start or succeed as an entrepreneur. The more important elements are to identify a viable problem which your business can solve – this is true value creation, start small while thinking big, and gradually scale up the business.
For this article, let’s focus on starting small with the big picture in mind because that is what debunks the myth that cripples potentially excellent entrepreneurs. After you’ve had that grandiose idea, the next step should be to scale it down to a manageable size based on your available capacity. Pick a small chunk of the grand plan to start with.
For instance, someone who wants to own a chain of five star restaurants someday could start by cooking meals at home and delivering to customers. You can start with your immediate social circle; perhaps five of your friends. Another way to start could be to volunteer to cater for a friend’s birthday at work – make nicely packed meals for a few colleagues for a token. One successful sale would lead to another, and with consistency, more referrals in the long run.
Why start small?
This is fitting for a number of reasons. First is it gets the entrepreneur to actually start the business rather than procrastinate. Secondly it helps manage the risk involved in starting a new venture; naturally there’s less pressure when one stands the risk of losing N15,000 naira than N1,500,000.
An entrepreneur who starts his/her business with a loan from the bank or other investor funds would be under immense pressure to ensure prompt repayment to lenders. This often leads entrepreneurs to force products down unwilling customer’s throats or sell at ridiculously high prices. Such entrepreneurs tend not to act with the customer in focus, rather the lender is in focus.
More so, starting small gives a realistic picture of what the market is like. Because let’s face it, even the most interesting ideas on paper are often very different from market realities.
Eventually when the business needs to expand significantly, it would be easier to get investors on board. Whether its angel investors, venture capitalist or other financial institutions, a financier generally has more confidence in an entrepreneur who has equity contribution and experience because it shows that you’re just as invested in the business.
Ultimately finance is key to business success but it is not the foremost consideration, neither is it as real a constraint as we have come to believe. The key issue, after you have clearly identified a problem to solve, is to realize that you can start small and still build a successful and sustainable business. External finances are better for scale ups not startups.
You can start with what you have. For some people this means maximizing their network of friends; for others it might mean a pen and paper or negotiating with a tailor to make dresses and you both share profit after sales. But I dare say, people hardly ever have nothing to start with. The issue just might be relating the seemingly little you have to the great plans you picture.