How Important is Capital in an Early-Stage Business?
A question that I often hear is whether or not you need money to start a business.
The answer is, “Yes” and “No”. Let me elaborate.
Is it possible to start a business with zero or minimum money? Yes, it is, and it has been done several times by scrappy entrepreneurs.
Now, is it optimal to start a business in that way? The answer here is “No”.
Look, stories of registering a domain for $9 and going on to create an online empire are romantic and nice to hear.
Personally, when my partner and I launched our first website, this is the route we followed. Our only cost was the domain, and everything after that was pure profit.
The venture turned out more than successful, but looking back, it would be wiser to allocate a small amount of money to kick-start growth and expand operations faster.
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The bottom line is that you are going to need some capital to get started.
Otherwise you are going to compensate with something even more precious: Time.
Not only you are going to tie up your own time waiting until your efforts materialize into growth, but also, you will run the risk of having competitors getting into the opportunity and eating up your lunch.
With my second major venture, I plowed some of my savings into getting things off the ground as quick as possibly.
This allowed me not only to quickly validate the concept, but also to gain a strong head-start against the competition.
If you can afford it, and you have done your due diligence on the project you are about to launch, I highly recommend investing some money at the beginning.
In the current environment, I would estimate that you will need a minimum of $5-10K for each attempt that you make with a new project.
This money will allow you to test things, validate assumptions and kick-start a business that can generate up to 6-7 figures per year in revenue.
If your business model is one with high Return on Capital and you reinvest the profits into the business, you might be in a position to build a business that generates even higher revenue than that.
So, how do you get that initial money when you don’t have any?
You get a job!
Oh, the blasphemy! Ilias is now advocating getting a job. Where has the world come to?
Chill and let me explain.
Look, first of all, we should be pragmatist. The reality is that the fastest and more reliable way to get some steady incoming cashflow is to get a job.
We are talking about a temporary, transient situation here, something that will allow you to hoard some capital and plow it in your venture.
I am not saying that getting a job is a solid long-term approach. Having a salary is like having a drug addiction, and your mid-term goal should be how to ditch the day job in order to focus solely on your business.
Some specifics. It is preferable to get a job in the industry you are planning to launch the business. This will allow you to acquire intelligence and gain some extra insights, while getting paid.
Even if you start with zero knowledge in the space, it is possible to gain some self-education and then land a job in a position that will get you exposure to the insides of the industry.
You will then make sure to save as if there is no tomorrow, so that you are able to reach the target amount of capital you have set as fast as possible.
Even if you have reached that amount, I would recommend keeping the job while you are testing out your venture and keep accumulating money.
This stream of capital can be then either used into the project if it shows signs of traction or used to try a new one.
Before ditching your job, I would recommend having a financial buffer of 6 times your monthly personal expenses and that your business has produced steady (or rising) net income that surpasses your job’s salary for 6 months in a row.
Of course, this is a conservative approach and the optimal one in your case will depend on your personal situation and personality.
To wrap things up, capital is one of the most precious resources needed in a business and you should handle its allocation with care.
At the early days, when you are low on resources, you need to be that much more efficient in order to break through the initial hard phase and build up some traction.
Treat your capital with the respect it deserves and it will help you build and scale a business that can change your life!