This article first appeared on the shopify.com blog on July 30, 2013.
Despite the rise of the lean startup, crowdfunding sites and inexpensive software, there are still many business that never get off the ground simply because they lack sufficient capital.
Saving money and generating capital to start a business is tough and we’ve all heard stories about famous entrepreneurs working out of their bedrooms and barely scraping by when they were just getting started.
That’s why being frugal and spending money prudently from the outset makes considerable sense for the following reasons:
- Rational spending inculcates a culture of disciplined thrift and investment. Examining each expense to ensure the greatest possible value for each dollar maximizes and justifies your entrepreneurial capital.
- Few companies are able to rely exclusively on internally generated funds (revenues and/or profits alone) during the initial stages to build a base for sustainable long-term growth. Investment in the form of loans or equity is invariably required, a process that inevitably dilutes the founder’s ownership and control.
- Extending the period between start-up and the need for additional capital infusions to later stages of the growth curve tends to expand the pool of competing entities which may invest, and is generally reflected in a lower cost of capital, either in the form of lower interest rates or higher entrepreneurial retained equity.
- Delaying the need for outside capital until proof of concept, quantification of potential revenues, and/or achieving some level of profitability improves your negotiating position with potential investors. Simply stated, reducing expense maximizes cash flow, which reduces the level of revenues necessary to achieve break even, and increases profits.
Founders of companies that survive the start-up phase are likely to find their roles, authority, and return reduced as control of their companies is transferred to those who subsequently finance later stages of the company’s growth. The reality is that postponing the need for outside capital until strategically necessary is always good advice.
