You can forgive many startups for their dreamy-eyed aspirations of overnight success. Online media is full of stories of billion dollar companies which were seemingly created on the smell of an oily rag – in a minute – by a business-savvy student or IT nerd with a big idea. Names like Facebook, Google, Dropbox, Uber and Snapchat all come to mind.
The exceptions to the rule
But the truth is that these are the exceptions to the rule. According to The Wall Street Journal and Dow Jones VentureSource, there were 123 startups valued at over $1 billion as at October 2015. When you think that there are hundreds of millions of companies in the world (last estimate from Dunn & Bradstreet was 235 million in 2013), that’s a pretty small percentage.
And it’s natural to idealise these entrepreneurs into an almost cult-like worship – think Richard Branson and Steve Jobs. But don’t for a second think that their achievements came without blood, sweat and tears… and one more little thing…
The one truth
I’m talking about money. Mulah. Funding. Capital. Loans. Investments. Venture Capital. Equity. Savings.
Whatever you want to call it and wherever you get it, it’s the one thing that no-one seems to openly talk about. For all the advice being dished out by the so-called business gurus out there, I’ve yet to read a single article on how essential it is to have some money before you even contemplate your startup.
I can imagine some of you rolling your eyes and thinking “derrr”! But I ask you this question – do you know someone who decided (perhaps on a whim) to start a business without a cent to their name? No savings, no loans, no access to any type of funding? I bet you the answer will be yes. It might even be you!
I come across it almost every week in my business. Someone has a big idea they think will take off. They do some research and a bit of planning and before you know it are “open for business”, hoping and praying that customers will come flying through the door.
“For all the advice being dished out by the so-called business gurus out there, I’ve yet to read a single article on how essential it is to have some money before you even contemplate your startup.”
Why the oily rag has to go
Because hope is not a strategy and the smell of an oily rag is no way to conduct a business – or to live – here are the reasons why lining up funding should be a prerequisite for every startup and not an afterthought.
1. It takes time to generate income.
It takes time for your ideal customers to hear about you and then decide to buy from you. And unless you are selling very expensive products or services, you will likely need more than one or two customers to generate a decent income. So the question every startup needs to ask themselves is how do I pay the bills until the business is generating revenue.
2. Income as a sole means of funding is risky.
Especially in your early days, income can be lumpy. You will have good months and not so good months. Your income may be seasonal or fluctuate due to factors out of your control such as the economy or environment. Therefore relying on income as your sole source of funding is not always a good strategy.
3. You can only get so far with free or cheap resources.
I am a big advocate for using free and cheap resources for key functions within your business. Take a look at my article on this very topic – 21 Tools and Resources for your Small Business.
But you can only get so far with these types of resources. As you grow into a serious business, you will need to invest in staff or appoint specialists or consultants. You may need equipment and technology. Once you hire people, then you may need to look at premises. All this costs money, especially if you want quality resources.
4. It’s just too stressful.
Anyone who has struggled to make ends meet in their personal life has to admit it’s horrible. Unfortunately this is a common issue in our society today. But seriously, who wants to live like that? And who wants to run their business like that?
The pressure that I have seen on some business owners as a result of having no income and no other forms of funding can be all-consuming and incredible. It makes everything seem hopeless. The smallest business purchases become major decisions. Relationships become strained. Quality goes out the door in favour of cheap suppliers and supplies.
5. It doesn’t have to be difficult to secure funding.
Funding can come from many sources, such as your own savings, loans or investments by friends and family, Angel investors, shareholders, traditional lending from banks and other financial institutions, government grants, and crowdfunding. And despite the hype, it isn’t that difficult to secure funding from one or more of these options.
Some are more challenging than others and all need some planning and/or putting a business case together. But if you’re serious about your startup, you will need to do these things anyway.
“…having no income and no other forms of funding can be all-consuming and incredible. It makes everything seem hopeless. The smallest business purchases become major decisions. Relationships become strained.”
So where to from here?
It would be false to say that businesses without startup capital are not successful. There are many examples to disprove this, some very well-known brands and some not so well-known. However in my opinion the struggle involved to build a business without some form of funding, both as a buffer in times of hardship and to support future investment, is just too hard a proposition.
And that kind of struggle is what leads to 74% of startups in Australia failing in the first 5 years. Many of us start our own businesses for a better quality of life and to pursue a dream. So why not give ourselves as entrepreneurs and business owners the best chance of success by securing funding upfront?
* Image sourced from Unsplash.
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About the Author: Angeline Zaghloul is an expert in business strategy, client management and business processes, and is the Director and Principal Consultant at Peer Business Consulting, a Sydney-based consultancy providing strategy and operations support to startups and SMEs. Angeline also publishes a regular blog which provides research, advice and tips on key issues facing businesses. Angeline also regularly writes for Modewest Business & Lifestyle Magazine.