The successful start-ups constantly test hypotheses. Photo: istock
Consider this: a young entrepreneur starts an online furniture retailer with $10,000. Another starts an online pharmacy with $20,000, and a construction franchise gets going with $25,000.
Welcome to the world of “lean entrepreneurship”, where Gen Y entrepreneurs start successful ventures on next to nothing. This is far from traditional “bootstrapping”, where entrepreneurs watch every cent to slash costs. This new model of lean start-up businesses requires new thinking.
Three of the four companies I interviewed for the annual BRW Fast Starters, a list of fast-growing start-up ventures, started on surprisingly low capital.
Fidarsi Furniture got going after founder Neil Singh doubled his $5000 bet on a casino roulette table, and Okme.com.au and Smith & Sons also took the lean approach. None of these companies wasted months writing business plans and persuading investors to provide large amounts of capital.
They just made it happen. Of course, some entrepreneurial ventures launch with low capital because that is all their founders have. Lean entrepreneurship is by necessity, rather than choice.
Fidarsi now has $2.4-million annual turnover and Okme’s revenue last financial year was $3.9 million. Not bad given they started on $10,000 and $20,000 respectively.
What’s your view?
• Do you expect to see more young entrepreneurs start ventures on next to no capital?
• Will it work? Is it becoming easier to get going on far less capital these days?
• What is the downside on starting with low start-up capital?
• What is the upside?
The BRW Fast Starters research provided several entrepreneurial insights. The first is that traditional business courses that teach entrepreneurs how to write detailed business plans, mostly to raise capital, are increasingly irrelevant.
I remember spending several months writing a beautiful business plan that was old as soon as it was finished. Business plans are important for ventures where there is a clearly established market and competitors, or for those that need significant capital, and a plan and valuation to show investors.
But many start-ups search for a business model, meaning elaborate plans are unnecessary and possibly do more harm than good. These entrepreneurs do not need to raise significant equity capital upfront, so marketing documents, such as detailed business plans, are often redundant.
More important is an ability to get to market quickly and adapt as circumstances change. The successful start-ups constantly test hypotheses; they launch a product or service, test it quickly with customers, refine it, change their business model if needed, and figure out what works.
Their goal is a repeatable, scalable business idea that can grow quickly.
Their ethos is: “The only way to know if this product works is to launch it and let the market tell me.” No amount of desktop research, market surveys and focus groups will tell them for sure if the product will work.
Another lesson is the ability to fund ventures from early cash flow. No venture will survive on $20,000 or $30,000 for long if cash arrives slowly. BRW Fast Starters entrepreneurs I interviewed focused on rapid growth in cash flow from day one, not months after meeting customers and building a reputation.
Perhaps the best lesson is that they had a go. I don’t know many older entrepreneurs who would start a venture on $10,000 and risk not earning a wage for several months. This model of lean entrepreneurship requires a different level of risk tolerance to traditional start-up thinking.
It has so much potential. Starting a venture with far less capital that in years past should mean more entrepreneurs getting to market faster, trying more things and being more innovative.
It could also mean young entrepreneurs focusing on several ideas at once, rather risking everything on one idea, and being able to recover faster from failure because fewer funds were invested upfront, and less funds are needed to start again.
Not having to raise equity capital from investors will also give these entrepreneurs more freedom to grow their venture, although it could also mean they lack important discipline that comes with having investors who require more structure and earlier returns.
Of course, not all ventures start with $10,000 and I’m sure many that do, fail. Being well capitalised at the start also has its benefits, especially if the venture needs to scale rapidly. And not everyone is able to live at home and run a venture, and start again with their parents’ support if things fail.
But one senses a critical barrier in starting small ventures – start-up capital is rapidly diminishing in some industries. And the concept of running start-up ventures lean and mean is reaching new extremes, thanks to the internet, online business models, and the ability to outsource work overseas.
It would be wrong to overstate this trend at this stage, based on interviews with a handful of young entrepreneurs. But it is worth noting that some entrepreneurs are rewriting the rules for start-up capital. Maybe you can join them in your next venture.
- The BRW Fast Starters issue is on sale now.