It’s hard to deny that a little seed money, a line of credit, and a few investors can make starting a company a whole lot easier. Instead of setting your sights on securing funds, you can focus on the things that often helpturn a humble startup into a sustainable business, such asdeveloping a solid product, establishing a sales methodology, and recruiting top talent — not to mention paying your talent what they’re worth.
But having little to no capital at the beginning isn’t as bad as you think. It can actually lead to a more profitable company in the long run. Here are four positive outcomes that having a lack of funds can produce:
- It Forces Capital Efficiency
When you enter the startup space with too much money,there’s often a temptation to investin certain business expenditures too early. For example, you mightexpect to see markedgrowth within the first two years, so you getmore office space in anticipation. But if your projections are off, the impact on your business is twofold: not only are you working at higher costs, but you’re also bringing in less revenue.
On the other hand, having limited fundsforces you to count every penny and become extremely capital-efficient. As you work to generate more value out of every dollar spent, this mentality can resonate throughout the organization and have a significant impact on the bottom line, especially as the company scales and other people become responsible for purchase decisions.
- It Validates Business Fundamentals
Too much cash at the startup phase can lead you to believe that sacrificing profitability for growth won’t impact your profitability later on. Although connected, profit and growth aren’t interchangeable. In fact,counting on growth to drive profits isn’t the safestbet, even with a sizeable bank account. Given enough time, you’ll have nothing to reinvest into your company, if things go south.
When you have limited funds, your only option for growth is to become profitable. Profits are the only source of growth capital. You can’t simply slash the price of your products or services to drivesales. It might bring in revenue — but at the expense of profits. Instead, look for other avenues to drive profitable growth.
- It Sharpens Negotiation Skills
With money in the bank, you might not feel inclined to negotiate with suppliers, vendors, and even retailers. You might opt to sidestep the search for maximum efficiencies, which can cultivate a complacent mindset. But what if cash runs out? You’re now at the mercy of investors and markets with rapidly changing interests.
Every dollar counts when you’re cash-strapped, so you learn to negotiate. During the lean years at my startup, the lack of funds motivated me to foster relationships with potential business partners, and it’s a skill I still use today. My company has signed deals with a number of clients, simply because they liked us better.
Being a smaller company also affords a little more flexibility from many suppliers and potential retailers,amid negotiations. If you ask for a price break, you might get one, and the initial cost savings could follow you as your startup scales.
- It Guides Talent Development
Startups with plenty of capital can afford to hire people to fill distinct roles, so no one needs to don more than a single hat. This might not seem like a problem at first. But hiring too many people too quickly can cause a cultural black hole. Then employees become territorial with their responsibilities, which can lead to talent inefficiencies.
With a limited budget, though, you must keep costs to a minimum. When my company opened its doors, my partner and I did as much as we could ourselves. It meant a lot of late nights, but it provided a personal touch and cost savings that our clients came to enjoy. As we brought on staff, we were able to organically nurture in-house talent with this “homemade” attitude,that remains to this day.
When to Look for Capital
Sometimesyou have no choice but to look for funding by raising debt or equity. Don’t take this decision lightly, though. Bringing on new money means bringing on new interests, which can impact your business in ways you’re not equipped for. There are a couple steps you can take in preparation.
First, ensure you have a minimum viable product. It’s also a good idea to have some sales history that can be used to make realistic growth projections. Lastly, you need an addressable market, where both the product and your business as a whole make sense. The key to raising capital is being prepared and informed.
When you don’t have money in the bank, you’re forced to become extremely resourceful. As you squeeze by on low funds, emphasizing efficiency and gaining insight from building the company with your own two hands can propel your company toward profitable growth — and fast.
Image credit: CC by Alexander Baxevanis
