Building a business on the cheap
Article Date: Jul 08 2009
It may seem out of character for a venture capitalist to say this, but you don't need investment to create a great business, writes SImon Cook, CEO of VC firm DFJ Esprit.
Coupons, cash-back discounts, and consumer advice are hugely popular on the web at the moment, and the papers are full of articles on how best to stretch your budget as a consumer. But how can a business make more of its cash and how do you launch a start-up with very limited capital?
Building a successful business often doesn’t come cheap. In the last five years there have been over 120 successful companies that European entrepreneurs and their VCs have exited with a mean value of $300 million, but each company had raised around $40 million of VC cash on average.
In the US, to build similarly valued businesses, the average company has raised a whopping $70 million (who says the US has a home market advantage). Today an entrepreneur looking to raise $40 million, even over multiple rounds, faces a daunting – though not impossible – task. But there are many cunning ways in which you can reduce costs and start a business without the need for large amounts of capital.
Developing a new product can be costly, especially if it is based on years of research and requires strong intellectual property protection. But burning your business’ cash probably isn’t the best way to fund this research or build these products in the early days. Entrepreneurs can often find products ready for launch which have been developed inside companies or other large institutions, but are being ignored. The founding team at email storage and archiving specialist KVS acquired the software product they had developed at Compaq after they were made redundant, using their redundancy money (they sold out for $225 million four years later).
Another way is to find a strategic customer to fund the development of your first product, or you could develop a new internet service for very little. There are plenty of websites which can be used to find developers who will build your site to your specification quickly and cheaply. Kevin Rose apparently launched Digg for around $2,000. He paid a freelancer $12 an hour to mock up the site, $99 a month for server space and $1,200 for the domain name.
Nowadays, it’s not just servers that can be rented: new ‘cloud’ services mean that many parts of your IT system can be paid for on a per use basis. A word of warning however; you will need to be able to speak technically to these partners and manage them carefully with constant communication.
There is an old adage that half your advertising money will be wasted, but you won’t know which half. Fortunately there are much better solutions for marketing, which you will only pay for on a success basis.
Web-based affiliate programs can be an inexpensive, low risk way to grow sales quickly. An optimised search engine strategy is also another must, and building a community through tools such as blogs and social networks requires hard work and creativity rather than cash.
Remember that ‘cost per action’ or CPA models are starting to expand from the web to traditional media like TV and print too. So don’t be afraid to ask for a results-based approach to pricing when negotiating any media campaign in the current market.
It always amazes me how many businesses forget to ask their customers for cash, and instead turn to investors or banks as their first port of call.
Many customers will be prepared to put down a deposit for a product in advance and this capital can be vital. Even companies like Tata are doing this: they have taken 95 per cent deposits for the first 100,000 Nano cars they plan to sell over the next two years, which has raised $500 million in cash before they have sold a single one.
Coming from a venture capitalist, it may seem odd to suggest that you don’t need lots of funding to build a successful company, but technology is changing how businesses can be built and VCs also need to adapt to the times. There will always be select projects which require more capital, and can become hugely successful global businesses. But there is also a lucrative opportunity in making smaller investments, where exits at reasonable valuations can generate significant returns given the smaller amounts of capital invested. In addition, VCs are evolving as ‘secondary’ purchasers of stakes in bootstrapped businesses, allowing entrepreneurs and angels to partially cash in after building a business themselves without having to wait many years for an IPO or full exit.
All of this should be an encouragement to you entrepreneurs (and capitalists) out there: as technology and innovation evolve, opportunities appear, entrepreneurs grab them, and capital flows efficiently to create wealth and growth.
Simon Cook is the CEO of venture capital firm DFJ Esprit and has been involved in the UK venture capital industry since 1995. He has invested in many of Europe's most successful technology start-ups, with past successes including Cambridge Silicon Radio, Virata, nCipher and KVS. Previously he was a partner with Elderstreet Investments and a director of 3i in Cambridge.
