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How to turn thousands into multi-millions

Date
Starting with a small amount of capital can lead to more riches in the long run.

Starting with a small amount of capital can lead to more riches in the long run.

How much capital did your venture have upon launch? Was it too little, just right or not enough? Has a lack of capital been a constant problem and limited your venture’s growth?

In a small market such as Australia, access to capital is a constant challenge for many emerging and established small ventures, especially those developing new technologies.

But what about the reverse problem: having too much capital at the start? Being overcapitalised upon launch or soon after also cause headaches - such as giving away too equity for the investment - even though it seems like a dream problem for capital-starved ventures.

I’ve thought a lot about capital-raising after writing this week’s BRW cover story, Lean and Mean: the new thinking that is changing start-ups. It looked at fast-growth ventures that started with $20,000 or less and applied the concept of ‘lean entrepreneurship’.

As well as interviewing several fast-growth ventures, I used this year’s BRW Fast Starters survey to gauge latest capital-raising trends in start-up land. The survey is based on detailed responses from 100 fast-growing start-up ventures on a range of business-building topics.

One in 10 ventures on the list started with $5000 or less in capital and 12 started with $5000 to $20,000 in seed capital. Each has built multi-million-dollar revenue.

The survey does not show if the venture had other income sources, such as the founder tipping in money from a second business, or if it had customers willing to underwrite early sales. Still, it is clear from the survey and subsequent interviews that more start-up ventures are starting on next to nothing.

  • What’s your view?

         - Did you try to raise capital before your venture launched?
         - If yes, where did the capital come from and how hard was it to raise?
         - Did a lack of funding impede your venture’s early growth?
         - What were your biggest capital-raising obstacles?
         - Did over-funding at the start lead to poor decision-making, where funds were wasted?

Some fast-growth companies I interviewed said low capital upon launch helped, rather than hindered them.

They would have tried to grow the venture faster and invested much more in branding had they been flush with funds at the start. That could have badly damaged the venture’s prospects.

One featured company, digital marketing agency Cohort Digital, typified a different mindset towards capital. Founder Malcolm Treanor said: “In some ways I think our focus could have been diverted if we had more capital at the start, because we might have tried to grow Cohort faster.”

That’s not to say Cohort and other fast-growth ventures are against raising capital. Rather, it is a question of timing. They see greater value in raising capital once the business model is clearer, the venture is established, and the equity is worth a lot more.

Capital-raising, of course, depends on the venture. One with a clear business model, target market and product might need significant capital at the start to grow rapidly and seize an opportunity.

Also, having shareholders can be a great discipline for a start-up venture and an experienced investor might mentor the founder.

Other ventures have no choice but to raise significant capital (or try to) at the start. High fixed costs and/or the need for high working capital to fund research or other product development means the venture will burn through capital during product development.

Even so, I can’t help think a new generation of entrepreneurs is smashing the rules of capital-raising and achieving so much more on so much less.

Rather than spend a year researching an idea, writing a business plan and pounding the pavement to raise capital, they release early versions of their product into the market, listen to customers, run quickly and adapt.

Another advantage is entrepreneurial founders do not sell slabs of equity in the venture when it is worth little.

They keep as much equity as long as possible and maximise its value.

Plenty of entrepreneurs over the years have raised significant equity capital upfront, only to overcapitalise the venture and give too much of it away too soon. Those that got it right were happy to have a smaller slice of equity of a much larger pie thanks to being well funded.

Clearly, there is no set rule for start-up ventures when raising capital. For some, it makes complete sense to raise more upfront and have shareholders. For others, it makes sense to push back any capital-raising until the venture’s business model, product and market are clearer.

What is obvious is the potential for start-up entrepreneurs to do so much more on less capital these days, thanks to the internet, and hold on to their equity longer.

And that the best entrepreneurs are finding new ways to launch and grow their venture, with or without enough capital.

2 comments so far

  • One way of viewing the captial problem: the big initial capital demand may well be the barrier to entry that created the opportunity in the first place. If you have little capital at the outset, you have little abiliy to employ people, so you end up doing a lot more yourself. it is hard to see any advantage in that, except control. As you imply, if you write a business plan and bring in outside investors, you could benefit from having some mature business advice, but the price for that is you will get constraints imposed on you; you relinquish a lot of control. I do not understand how one can have too much capital, though, as long as you remain focused and disciplined about its application..It is hardly surprising that immature entrepreneurs take it too easy once they strike a supply of capital. It delays progress if it is allowed to remove the urgency of success. Plenty of capital may entice you to bite off more than you can chew. It is unwise attempting to implement all components of a business when your distinctive competence lies only in one or two areas. This helps explain how the internet can be a good way to get into business, because an entrepreneur can become an information broker, leaving product sourcing, manufacture, logistics and delivery work to someone else better equipped to do it. A true enrrepreneur is not an arrogant businessman but rather a learner, willing to adapt.

    Commenter
    engineer
    Location
    sydney
    Date and time
    July 23, 2012, 4:54PM
    • Steve Blank has a great blog about how startups are different to companies - in a nutshell: a startup isn't applying a business model (as laid out in business plans); it is looking for one.

      Commenter
      Evan Hadkins
      Location
      Sydney
      Date and time
      July 30, 2012, 10:25AM

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