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Best Source of Startup Capital – Customers!

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The single biggest problem for startup businesses is the lack of startup capital.  It is very challenging to start a business with few resources.  Many experts state that under-capitalization of a business is one of the large reasons for failure.

I started my business with $500.  How did I do that?  First, I prepared for the event.  I planned to draw no income for the first year, so I reduced my lifestyle, increased my savings and built a buffer to handle that early dry period.  Next, I focused on getting to cash positive as quickly as possible.  That meant lining up customers early.  Pre-selling is a technique that entrepreneurs don’t do often enough.  I kept every expenditure low.  I wanted to prove that the product was going to be successful, before ramping up investment.  How did I know if the product was a success?  The customers and marketplace told me.

Was it easy at first?  No.  It was brutal.  When the business began to grow, I took out bank loans and used my home as collateral.  The business was almost 10 years old, before I was able to able to remove the home pledge from the business loans.  I never spoke to a venture capitalist.  It took a lot of sacrifice to my lifestyle, but it paid off more than I could ever imagine.  My main engine for growth was customers.

The best part about customers is that their only interest is buying your products or services.  Customers don’t receive equity or interest on their purchase.  So, in terms of capital, selling products and services is the BEST way to raise capital.  Banks want lots of collateral; such as your home.  Venture Capitalists want very large returns, equity and control.  Customers don’t want your home or control of your business.  They simply want you to deliver what you promised to them at the agreed price.  Make a profit on the agreed price and use that profit to invest and grow your business.

A mentor told me one reason that my business was successful was because I did not spend time chasing capital.  I have seen businesses spend all of their time trying to woo investors.  The investors become the customer, instead of the customer being the customer.  The business owner thinks that capital investment solves all problems.  It does not.   Profitable sales solves problems better than anything else.

One final thought.  Keep your expenses under control.  You don’t need the fancy office or car when you start up.  You don’t need excess staff or over-engineered products.  Managing expenses is a challenge.  In start up phase, capital is so precious.  Protect it.

Entrepreneurs Start with a Customer

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I am often asked about resources to start a business.  Too often the startup entrepreneur is asking the wrong questions and looking at the wrong issues.  Before starting a business, a prospective entrepreneur must answer the marketing questions.

The most important issue around starting a business is the customer.  Let me say this again: THE MOST IMPORTANT ISSUE AROUND STARTING A BUSINESS IS THE CUSTOMER! Who is the customer?  What need (product or service) are you satisfying that they are willing to pay you?  Why is no one willing filling that need now?  Or are they?  How much are they willing to pay?  What makes your product or service superior to the alternatives?

Many entrepreneurs focus on financing, building, location, etc when starting a business.  Instead, they should answer the questions honestly before looking at anything else.  The #1 need of entrepreneurs at all levels is customers.  Without customers, you have no business.

When I started Gasper Corporation, I benefited from the business classes I took at Wright State.  The most important were marketing and accounting.  I used the concepts of target marketing to make the business viable and effective.  So here is how I answered the marketing questions.

David Gasper - Back in the day...

Who was the customer? The 500-1,000 Automatic Teller Machine (ATMs) departments in banks worldwide.

What need did they have? The ATM industry was in its infancy and availability (uptime) was not considered thoroughly when ATM networks were designed.  The cost of downtime hurt their profits and bank image.

Why was no one filling that need? The startup industry offered the opening.  Competitors offered offline manual products while we had a chance to offer online monitoring and management.

How much were they willing to pay? We developed a pricing model based upon the size of the network.  Larger networks paid more as their problems were larger.  Our pricing model also reflected a payback based upon two values that our product offered.  1.  Our product reduced labor costs, so that savings was part of the price.  2.  Our product increased revenues from higher availability.  We factored that into our price.

What made your product superior? I started my career as an ATM programmer.  I understand the sensors and status signals better than others who designed management systems with no ATM experience.  I also understood the specialized switches (such as Base24) that processed ATM transactions.  Finally, conventional wisdom at that time did not believe that personal computers could process online transaction.  From my programming efforts in 8080 assembler and low level code of personal computers, I saw that was not true.  PCs were the wave of the future with more power in smaller boxes for less cost.   This specialized knowledge allowed Gasper Corporation to create unique position.

So we picked a small limited market with little competition that we could dominate. We stayed very focused on that small target market of 500-1,000 customers.  We could have created monitoring products for many other markets.  In doing so, we would have been wiped out by large competitors such as IBM, Hewlett Packard and Computer Associates.  Instead, we chose to target one specific market and be the BEST in that market.

The rest is history.  So, before you go looking for start up funding, answer the questions above honestly.  If the answers are not satisfactory, then FIX them with the right honest answers.

Where Are All of the Entrepreneurs?

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I keep asking myself this question.  If we want to make Dayton spectacular, entrepreneurs are the key.  But where are they?  I can’t find as many as I would like.  What is holding people back?

I am approached by numerous “wannabe” entrepreneurs.  I am dismayed however that the vast majority will remain “wannabes” instead of making the leap to success.  Why aren’t there more entrepreneurs?

Entrepreneurs must have a stomach, insight and passion.  Starting a business is risky.  You have to be willing to work long hours for low pay and take a risk to start your business.  This unwillingness to struggle and risk disqualifies many hopefuls.  A startup business person must have insight into a market or customers that is realistic. (Watch for my next article about marketing) .  Find a niche market and become the king of that niche.  Finally, the startup must have a take no prisoners attitude in its approach.  No problem can get in the way.

In Dayton, Ohio we have great resources for business.  We have The Entrepreneur’s Center. Small Business Development Centers (SBDC’s) in Dayton , Fairborn, Piqua and Springfield, SCORE®, Aileron, universities, access to financing and more.  Yet, the population of startup companies is very small.  I am baffled.

Funny thing, when I started my business, almost none of those support systems existed.  I felt there were more entrepreneurs then vs. now.

I would not trade my journey for anything.  The road during the first five years was hard, even brutal.  In the end, I am living the American dream reaping the rewards of creating a business that increased jobs as well as security for my family for the rest of my life.

If you really want to start a business, I suggest that following:

  • Ask yourself about risk and what you are willing to do.  I find that the risk question is what holds most people back.  They are unwilling to meet the dream because their fear holds them back.  If you want the benefits without the risk, then you don’t have what it takes.  Sorry!
  • Examine your business skills.  If they are weak, your chances of success just went down.  Build your business skills.  Attend classes, read and get a business mentor.  Start a small micro business just to get the test market experience.
  • Get customers.  The philosophy of business is simple.  Get customers who are willing to pay for your products and or services.  Build it at a cost lower than your selling price.  It starts with the customer.  See my next article about marketing
  • Be realistic about your competitive advantage.  Guarantee that your offering is superior.  If you fool yourself, the marketplace will punish you
  • Be the King (or Queen) of a niche.  Don’t try to take on the big boys.  I have seen business plans that want to compete with Google.  Unless you have a millions of dollars to start, the business will fail.  Even the largest of businesses started with a niche.  Walmart built store in rural market at first instead of going head to head with the established players such as Sears.  Southwest flew out of an airport in Dallas that no one else wanted or could use.  Your competition is smart.  if you attack a large market, the will counter punch.  They are more likely to leave you alone if the market is small and you have a special expertise.
  • Solve the startup capital issue.  Too many entrepreneurs spend all of their time raising money.  Their customers become the venture capitalists or bankers instead of the true customers.  I started my business with $500 and never received a penny of venture capital, yet turned the business into a multi million dollar business.  I can’t tell you how many times I see entrepreneurs roll their eyes when I tell them not to use venture capital.  I will write more about this in future articles.