In my last coaching session, we discussed a lot on how to raise funds for a new business. I made it known to the would-be entrepreneurs that it was possible to start a business without funds. So I asked one student if she got a business idea, because it should be made clear that for you to start a business, you need to first of all have a business idea.
I am of the school of thought that you don’t actually need money to start a business, you first of all need an idea. Funds are most necessary when you want to grow a business. I know what you may be thinking now – how then do you start a business without money? What I trying to say here is that it’s rare to find someone who will put his/her money at risk on a project that has not been tested. It’s something like financing someone to go and use your money to test the risk involved in the business.
An entrepreneur who wants to raise funds needs to show an investor that (s)he has already done something and masters the business – what it takes and most of the risks involved. When it comes to products in particular, we talk of prototypes and samples. Once an investor sees that it is perfect and good for the market, that’s when they become interested and may put in their money.
Going back to what I was saying, this would-be entrepreneur said she planned to start a juice-making business and wants to begin with cucumber juice. So we had to look for a way to start her business without any funds. I thought of pre-financing from her customers (considering she had done a good market research). I told explained how she can propose to customers about her product and ask them to pay before hand so she can supply them afterwards. This can work well if you have a good negotiating power. You can even propose to the customers that you will sell to them at a lower price than the original/market price.
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However, some did not believe it was the right way to go about it. They said it wont be effective as people wont want to pay for something they don’t even know if it will be good. Their points were valid though, but all that depends on the entrepreneur’s convincing power when negotiating. There are many ways to do that. You can even promise to repay their money if it doesn’t meet up with their expectations. However, you should be sure of yourself and master your the production of the product well. I am presuming that the entrepreneur must have tested her product before taking it to the market.
The case of Dell Computer Technologies
Product pre-sale is nothing new in business today. There are m?p=31868&preview=trueany big companies that started like this and there are still many doing it today. Let’s take the case of Michael Dell, the founder of Dell Computers Technology which is one of the most popular PC production companies today. We all (some may not know) Dell was started by Michael Dell in his dormitory room while a student at the University of Texas at Austin in 1983, by then it was called PC’s Limited. Most of his sales was done through pre-financing by selling made-to-order computers for small businesses.
What Michael Dell did was, he would ask his customers to pay for their computer in advance. With the customer’s money in hand, he will hire his friends/schoolmates who will assemble the computer or upgrade them to meet their customers’ specifications. With this, he didn’t need any funds to start his business. He got this skill from when he was selling newspaper subscriptions for The Houston Post.
He had to go in for extra funding only when he needed to compete with big names like IBM and Compaq. That was when he had to raise more money for research and development from his parents who loaned him $1,000. When he received the money, he dropped out from school so that he could focus full-time on his expanding his business (this is an example of how far an entrepreneur who is passionate about his business idea can sacrifice to successfully build their business).
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Samsung and Apple still practice pre-sale to raise funds
The case of Dell is one in thousands of businesses that did raise funds using pre-sales. Even Samsung and Apple with all the money they have still do same today. When a new product is to be launched, they allow consumers to make pre-purchases before they officially launch the product. This method of raising funds is very good in the sense that it builds consumers’ confidence in your product brand and allows the entrepreneur to have a glimpse of the demand for the product before they put it in the market.
So it is possible for customers to give you advance payments that will help you start or grow your business. It is a very good method to raise funds because it shows the level of commitment by the customer to your product or service.
Don’t forget vendors of your product can also help finance your business. This may happen especially in the case where your business is at its growth stage and your product is booming in the market. The strategy allows start-ups with limited resources to grow faster without being indebted with high-interest loans.
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