If I could travel back in time to when I first started my distribution business and give my younger self a piece of advice, do you know what it would be?
“Start Small, Scale Fast”.
Start Small, Scale Fast is a business philosophy I have developed which allows new entrepreneurs with limited resources to fail an infinite number of times, and keep trying until they succeed.
Success, therefore, is guaranteed. It’s all a matter of time.
What I would have Told Myself
Making Money with Little or No Money
Minimize Risk by Minimizing Overheads and Investment
In Order to Succeed, be prepared to Fail, Over and Over Again
Scaling within the Limits of your Profitability
Jack Ma and Masayoshi Son
My Own Encounter with an Investor
A War Chest doesn’t have to be Static
What Kind of Entrepreneur Are You?
Start Small, Scale Fast Ideas
• Drop Shipping
• Crowd Funding
• Commission-Based Businesses
• Trading (in Services)
• Selling Information
• Be Creative
• Online vs Brick-and-Mortar
What I would have Told Myself
I would have told my younger self not to rent an office until I had enough profits to cover the cost.
I would also have told my younger self not to hire 2 employees after just 3 months in the business when it wasn’t yet profitable.
You see, 6 months into the business, the economy went into the Great Recession of 2008.
I wasn’t making money yet, but I still had rent to pay, and 2 pay cheques to write.
I remember that once, I hadn’t made a single sale for the entire month.
When the last day of the month came, I finally managed to close one deal, and it wasn’t even well-paying because it was sold on an installment basis!
That was the darkest day of my entire life as an entrepreneur. I swore that I will never go so low again.
I never did, but the business was getting into serious trouble. Within a few months, I had run out of money and had to raise more funds from my shareholders as well as take on a few loans.
With such anemic cash flow, the business was perpetually at risk of going into a dangerous tailspin.
Without sufficient cash, I couldn’t buy enough stocks. And when I get stocked out, the resulting loss in revenue exacerbated the cash flow problem, which meant even more stock-out situations.
The early mistake of taking on too much fixed cost at a time when I couldn’t afford it dragged me down for years to come.
If I could start all over again, I would have rented a small storage locker to store my goods and worked from home, instead of renting an office for both purposes.
I would also have delayed the hiring of manpower and continued as a one-man show longer.
It was the overheads that were killing me, and it took me almost a decade to claw myself out of the pit.
Almost every first-time entrepreneur I’ve seen starts off being overly optimistic about their business. I was no exception.
In the original business plan for my distribution business, I thought I was going to make $1 million in revenue and become profitable within the first year. I was convinced that there was a lot of pent-up demand and that I was about to hit a gold mine.
Boy, was I wrong!
I was right about the business opportunity, but wrong about the product mix and marketing mix.
I over-estimated consumer spending power and was also overly optimistic about the pent-up demand. I thought that my business model made so much sense that customers will just flock to me in droves.
In reality, it took a long time to gain traction. And by the time I gained traction, competitors started copying my business model, which pulled me back quite a bit.
Instead of 1 year, it took me almost 8 years to hit $1 million in revenue, and even longer to turn a consistent profit.
Years later, I was approached by a former co-worker who wanted to start his own logistics company.
He was exceptionally good at running operations but had no idea how to handle sales and marketing, so he got me on board to handle that part of the business. He didn’t need me to invest any money, he just needed me to contribute some of my time.
He had a good idea that could help solve the problem of congestion on the loading docks of many shopping malls in the city. It was, genuinely, a good idea.
However, being more experienced and quite seasoned in dealing with corporates, I knew the idea would take a long time to gain traction. There were just too many stakeholders to convince; landlords, tenants, and suppliers.
I advised him to delay starting up the company because once he rented trucks and hired drivers, he would have fixed costs and therefore a high cash burn rate.
I told him he should try and secure an anchor customer that can pay for most of the fixed costs before starting, reducing the cash burn rate to zero, if possible.
I also advised him to go after contract logistics accounts, which had shorter sales cycles and were, therefore, easier to win. The contract logistics accounts would generate much-needed cash flow while waiting for the shopping mall business to take off.
Unfortunately, he didn’t heed my first advice and started off with trucks and drivers, ready to take on the shopping mall business.
Well, the shopping mall business never took off. But fortunately, he did take my second advice of going after the contract logistics business, and we did win some accounts within the first few months.
Today, almost all of our revenue is generated from the contract logistics accounts we secured in those early days, and the company is now profitable.
However, it will take several years before we can earn back the losses made in the early days when we had no business and an unsustainable cash burn rate due to fixed costs. Those early mistakes cost us dearly.
A friend of mine, who had no experience in education, decided to go into a partnership with other friends and start a tuition center. After a while, he went back to his former job of being a sales manager.
He never talked anymore about the tuition business, and I never asked either. I had pretty much expected this result.
He went into a high fixed-cost business, with little or no track record, and no particular competitive advantage. What were his chances of success?
Take a look around you and see if you can find any entrepreneurs who failed. Chances are, most of them were also overly optimistic about their business, over-estimating the market demand and under-estimating the challenges involved.
I have found that to succeed in business, it’s not so much about doing what is right, but more about avoiding what is wrong.
Unless you have a lot of money to burn, a “big bang” approach to business is very risky.
Making Money with Little or No Money
A few years after starting my distribution business, I met a business coach who asked, “If you can’t make money with no money, what makes you think you can make money with money?”
That question hit me like a sledgehammer. That’s exactly what I had been doing wrong!
If you are able to make money with little or no up-front capital, it means you have acquired the financial prudence necessary to make that happen. So when given a cash injection, you know how to make even more money!
But if your business model is no good in the first place, raising more money isn’t going to solve the problem. You’ll end up throwing all that money down the drain.
I read in the papers recently one of the biggest tech start-up unicorns in Singapore had revenue of $1.6 billion, but a net loss of $800 million.
Think about that! To generate every $1.00 of revenue, they spend $1.50.
Yet most people are so enamored about how much this unicorn was worth.
To me, it’s worth even less than any of my businesses.
At least all of my businesses were designed to make money, and not to burn investor money without limit or remorse.
If you don’t have a rich family, and you actually do want to build a profitable business (and not just a start-up that just burns investor money), then my Start Small, Scale Fast strategy is good for you.
Minimize Risk by Minimizing Overheads and Investment
In my example, I incurred a lot of overheads early in the business when it couldn’t yet afford those fixed costs.
The central principle in the Start Small, Scale Fast strategy is to minimize risk.
Quantitatively, risk has two main components: Overhead and Investment.
Overheads, or fixed costs, are the running costs you incur, whether you have revenue or not.
In my example, my overheads were the rent and payroll.
The landlord doesn’t care if you’re making any money, he just wants his rent paid.
And you can’t have people working for you for free either, you are legally obliged to pay them the promised wages.
Variable costs are expenses that happen if, and only if, there is a sale. Examples include your cost of goods sold, delivery costs, and commissions.
Revenue less Variable Cost is called the Gross Profit, and this is generally positive. Under normal circumstances, no businessperson will set his selling price below his cost price, unless he is trying to liquidate obsolete inventory at a loss.
Gross Profit = Revenue – Variable Cost
Operating Profit/Loss = Gross Profit – Fixed Cost
The main challenge for most loss-making businesses is that their Gross Profit is not enough to cover their Fixed Cost.
Therefore, the lower you keep your fixed cost, the greater your chance of making a profit.
And even if you fail, the accumulated losses for a low fixed cost setup will be limited, allowing you to live and fight another day.
In the beginning, when your business is new and full of unknowns, you should target to keep your fixed costs as low as possible, even if it means higher variable costs and lower profits.
For example, outsource your warehousing and pay on a per pallet basis instead of renting your own warehouse, or hiring part-time contractors and freelancers instead of full-time employees.
Your investment is money that you spend in expectation of it generating a positive return on investment (“ROI”).
In my case, most of my start-up capital was invested in inventory.
If I fail to sell a single unit, the inventory may or may not have a liquidation value.
It can also be money spent on marketing and advertising, which you have to pay upfront without any guarantee of sales.
So the higher my investment, the greater my risk, because the more money I stand to lose.
Investment Loss = Investment – Liquidated Value
In investment, there is a saying, “take care of the downside, and the upside will take care of itself”.
Whenever I look at an investment or a business, I always ask myself, “what’s the worst that can happen?”
Let’s look at the maximum downside of starting a business. The worst-case scenario is likely to be a combination of two things:
- You fail to sell anything. Revenue is zero, but so is variable cost.
- Your investment has zero liquidated value.
In such a case, the direct financial damage is the sum of all your fixed costs incurred for the period that you were in business, plus your investment loss.
In fact, the fixed costs may be there long after your business has been closed. Commercial property leases, for example, usually make the tenant liable for paying rent for the entire duration of the contract, even if the tenant winds up the business before the lease expires.
Worst Case Financial Damage = Total Fixed Costs + Investment Loss
This is why in order to reduce your risk, you should try to minimize both your Fixed Costs and your Investment.
My favorite example is the restaurant business.
To start a restaurant, you need to invest at least a 6-figure sum in equipment, renovation, and furnishing.
You also need to sign a rental contract, which typically lasts for 2 years or more, that legally obliges you to pay rent for the entire duration of the contract.
You also need to hire some employees.
This is a very high-risk set-up. In the worst-case scenario, if the restaurant failes to get a single customer and winds up after 6 months, these are the losses facing the restaurant owner:
- Rent x 24 months
- Wages x 6 months
- Renovation Costs
- Re-instatement Costs (to restore the premises to their original condition)
- Investment in equipment and furnishings less salvage value (if any)
- Food, supplies, utilities, and other running costs x 6 months
- Non-recoverable investments e.g. advertising
As you can see, if you start a restaurant with your own savings and/or borrowed money, you can very quickly become bankrupt. And this can hobble you for years to come as most of the money you make ends up being used to service the debt instead of being re-invested into other more profitable ventures.
Conversely, let’s say you start off as a home-based virtual restaurant, with nothing more than an electronic storefront and utilizing food delivery e-commerce platforms to sell and deliver your food.
Your fixed cost is close to nothing.
There is no rent, no payroll, and no utilities to pay for since you’re operating out of your home.
Perhaps there is a small subscription fee to use the platform, but that is peanuts compared to the rent payable by a physical restaurant.
Yes, the platform may charge you a high commission, but that’s a variable cost. In a cash-strapped start-up, variable costs are always preferred over fixed costs.
Your investment cost is also negligible. You are using equipment and kitchenware already available in your house.
So what happens if you fail? Say, after a month or two, you didn’t get a single order. What have you lost?
Not much, financially.
You can start to learn by trial-and-error, like fine-tuning your recipe, changing your menu, adjusting your price, taking better pictures, and spending more time (and perhaps money) on your marketing efforts.
Keep changing your strategy, until you get your first order, and then move on from there.
If you start a restaurant and for two months you don’t get a single diner, can you imagine how much of a toll it will take on you, both financially and emotionally?
Because of the high fixed costs, the cash burn rate is very high, which makes the cost of mistakes very high.
In Order to Succeed, be prepared to Fail, Over and Over Again
”失败乃成功之母“ (translated: Failure is the Mother of Success)
Starting a business, especially in an industry that you have no prior experience with, is inherently high risk.
You have a steep learning curve to climb, and it is only to be expected that you will make a lot of mistakes before you get the formula right.
Therefore, in order to succeed, you must plan enough room for failures.
When you have high overheads and a high cash burn rate, you have very little room for mistakes. That is why I advocate a Start Small, Scale Fast strategy.
When you start small, you also fail small. You can make an almost unlimited number of mistakes with very limited financial damage.
You can experiment constantly until you get the formula right. And once you get the formula right, it is time to scale!
Let’s go back to the virtual restaurant example.
Say, after a couple of months of trial-and-error, you start getting a steady stream of orders. You have curated your menu, optimized your pricing, and created a steady following of regular customers. But the business has grown beyond the confines of your tiny home and kitchen.
Is it now time to scale up and start a full-scale restaurant?
What you can do next is to move into a cloud kitchen. This is also referred to as a “ghost kitchen” or “virtual kitchen”, which is a commercial kitchen space that provides food businesses with the facilities and services needed to prepare menu items for delivery.
Compared with traditional brick-and-mortar restaurants, the rent is very much cheaper because they are typically located in light industrial areas, away from expensive retail areas.
You don’t need dine-in space, cashiers, or waiters. The whole set-up is optimized for food deliveries, taking advantage of the now ubiquitous food delivery apps on your smartphone.
But you can start hiring employees if you can afford it without losing money. The best and most loyal of these may become your core team leaders for years to come.
After you build up your regular clientele even further using the cloud kitchen as a springboard, you can then start considering the feasibility of starting a full-fledged brick-and-mortar restaurant.
Or maybe by then, the food delivery business has become so profitable and viable, that you no longer even have the desire to start a brick-and-mortar business.
Scaling within the Limits of your Profitability
When it’s time to scale, should you raise funds and grow aggressively, but risk biting off more than you can chew? Or should you scale in a way that is slower, but less risky?
There are two schools of thought.
One is to raise funds from investors and then pursue growth at all costs until all your competitors are wiped out and you are the lone king of the hill. That is when you start to make money, and hopefully, the profits will be enough to recover all previous losses.
I believe this is the more popular school of thought. Talk to young people who want to be entrepreneurs, and most of them will repeat the same mantra in one form or another.
Raising funds seems to be the focus rather than making money.
I am more “old-school” in this respect. I believe a business exists to make profits.
Raising funds enables you to pursue growth, but that is just one of many strategies you can employ, nothing more. Raising funds is the means to an end, not an end by itself.
My preferred approach to growth is to scale within the limits of your profitability. Let me explain.
Let’s say I am making $10,000 a month in net profits. If I invest $5,000 a month into a new project, I am scaling within the limits of my profitability.
If the worst-case scenario happens and the project flops completely, I will still make $5,000 a month. My overall cash flow remains positive, and I am not in danger of getting into a negative cash flow tailspin.
If I invest ALL my profits and spend $10,000 a month on the project, I may still break even if the growth doesn’t materialize.
However, this is still risky, because there is no buffer for economic shocks. If a sudden recession happens, or you lose a major account and your existing business isn’t able to sustain the $10,000 monthly profit, the money you lose on the project will drag you into a negative cash flow position.
If I spend, say $20,000 a month on growth but make only $10,000 a month, then the spending gap has to come from somewhere.
You either have to utilize your reserves, borrow money, or raise funds from investors. The growth may or may not happen, but the cost you pay for it will.
If you deplete your reserves, you have no buffer for economic shocks.
If you borrow, your interest costs increase, which puts further stress on your bottom line.
And if you get investors, you will also have to dilute your relative shareholding in the business, which reduces your future share of profits as well.
I’m not saying that it’s wrong to take the approach of raising funds from investors. Certainly, it makes sense in certain situations, like for tech start-ups where the technology is expensive to develop, and you can’t do it within the limits of your own finances.
What I am saying is that you need to be clear on your objectives. I have met many people who look for investors when they have no need to.
What do they plan to spend the money on? Why give up shares in the company when they can finance it internally or through loans?
Often, the answers I get are fumbled and illogical. They haven’t really thought through those issues.
To them, getting people to invest in their company seems like a badge of honour, a vote of confidence from investors that they can show off to other people. It’s good for their ego, but it’s not necessarily good for their business.
Or they’re doing it (i.e. getting investors, raising funds) because everyone else is doing it, and it’s all the media ever talks about. They are just lemmings following the crowd.
Jack Ma and Masayoshi Son
Jack Ma, the founder of Alibaba, described his first meeting with Masayoshi Son, the founder of SoftBank, the world’s largest technology venture capitalist.
Jack Ma dressed casually and went in with the mindset of just chatting. He wasn’t interested in money.
He just started to talk about what he wanted to do, and within 5 – 6 minutes, Masayoshi asked Jack, “How much money do you want?”
Jack replied, “I don’t want money.”
Masayoshi then offered him USD 40 million, which Jack rejected. The most investment
Jack had received up till that point only CNY 2 million (about USD 300,000), so he wouldn’t know what to do with USD 40 million.
Negotiations continued over several other meetings and correspondences, and the offer was reduced to USD 30 million, but eventually, Jack accepted only USD 20 million.
This is what true entrepreneurship is about.
Jack was very clear about what he wanted to do and was never seduced by venture capitalist money.
He knew what he wanted to do, knew how much money he needed to do it, and accepted only what he needed at that point in time, and not a cent more.
My Own Encounter with an Investor
One of the most successful start-ups that I co-founded did very well right from the beginning.
Within months, there was interest from an investor, but I was less interested in him than he was in me.
The business was generating a healthy cash flow internally, so if all the investor brings to the table was more money, then there was no point in me giving up equity and sharing my profits.
What I wanted in exchange was a ready-made regional distribution network. If the investor had a ready network that could put my products in several markets at one go, it would leap-frog our growth by 5 – 10 years.
The investor eventually went silent, but I didn’t chase him either.
And we never talked about money, how much the company was worth and how much he was looking to invest.
That’s because I wasn’t interested in money. I was only interested in being part of a bigger distribution network, which is more valuable than money.
The thing you should understand about the investment climate now is this: there’s a lot more investor money floating around than there are good opportunities to invest in.
If you have a genuinely solid, profitable business, don’t be too desperate to sell your equity to anyone who offers you bags of money.
Choose investors that can create value for you, like helping you to grow exponentially.
A War Chest doesn’t have to be Static
A lot of people think that you need a “war chest” to grow a business.
Raise funds, fill up your war chest with a million or two, and then spend aggressively on growth.
If it works and you start making a profit, well and good.
But if it doesn’t, let’s go back and raise even more money!
This is a “Start Big, Scale Fast” approach.
Profitability at the early stage is not the criteria for raising funds. What investors want to see is growth.
In reality, nobody spends the entire war chest all at one go. The spending is spread over a period of time. They spend it over a number of months or years, run out of money, and then raise funds again and replenish the war chest.
If that is the case, as long as you spend within the limits of your profitability, won’t you be able to sustain your investment in growth for an indefinite period of time, without ever needing to give up control of your company and sell shares to investors?
The amount you are able to spend maybe comparatively small, but you are spending well within your means, and any profits you make belong 100% to you and your shareholders.
Furthermore, if your company has a track record of profits, banks will come in droves to offer business loans. This is a tried-and-tested way to raise funds without giving up equity.
What Kind of Entrepreneur Are You?
So think about it. Which approach is more suitable for your life objectives?
Do you really want to run a big company that you don’t own, which loses investor money all the time and has an incredibly low success rate?
It may make you very rich at the expense of investors, but you have not made a sustainable positive impact on this world.
Or do you want to start small, and scale fast only when you become profitable?
Do you want to make money by making a permanent positive impact on the world? Adding enough value that people willingly pay for, and allowing you to make a sustainable profit?
You may not become as rich, but at least you’ll have a clear conscience as you’ve not gained your wealth at the expense of investors who trusted you.
It boils down to the kind of entrepreneur you want to be.
The choice is yours.
I can say with certainty that a Start Small Scale Fast approach has a far higher success rate than a Start Big Scale Fast approach. As long as you keep your Fixed Costs low and Investments low, you can afford to fail an unlimited number of times.
It won’t matter if 99 of your start-ups fail, because you only need 1 of them to be a runaway success.
And let me assure you, it’s not going to take 99 tries for you to succeed.
As long as you learn something from your failures and improve each time, you should succeed within 3 to 5 tries.
Start Small, Scale Fast Ideas
The online food business I discussed earlier is just one example of how to start small and scale fast. Let me share other examples.
One of the spin-offs of my distribution business was another distribution business that I co-founded, dealing with a different category of products with another partner.
Together, we pooled $1,000 and bought a product from a competitor.
We used my existing showroom and retail infrastructure, so there was no additional rental or manpower cost.
We marketed the product primarily through the internet and managed to generate a lot of interest, especially through the product videos.
But here’s the beautiful part.
When customers came in to try the product, we let them try the competitor’s product, and told them “it feels like this product, but looks like the one in the video”.
We took pre-orders with a 50% deposit, which we told customers were fully refundable anytime they changed their mind, or if the final product delivered failed to meet their expectations.
We then used the money from the customer deposits, plus a little bit of our own, and placed an order with the supplier.
By the time the first shipment arrived, we had pre-sold 75% of it!
We then contacted our pre-order customers to collect their products and pay the balance of 50%. There were a handful of refunds, but not enough to break our momentum.
We recovered all of our initial capital, and from then on, scaled the business using internally generated profits.
That business turn a profit within 3 months, but only because that was how long the first shipment took to arrive.
We were already cash flow positive within days, but from an accounting viewpoint, revenue cannot be recognized until the orders were filled.
And within a few years, it grew into a multi-million-dollar company.
We turned a mere $1,000 investment into a 7-figure company, with net profit margins thick enough to rival Apple.
And you know what’s an even greater irony?
We used an existing competitor’s product as a sample to help us pre-sell our own products!
This was a textbook Start Small, Scale Fast example.
With the advent of the internet, it has become increasingly viable to pursue Start Small, Scale Fast strategies.
For a distribution business, which is my bread-and-butter, you can start off by drop shipping.
This is an interesting business model, where you sell somebody else’s product, use his logistics capabilities, and make a margin in between.
A drop shipping business works this way:
- You get an order from a customer
- Customer pays you
- You pass the order to your supplier
- Your supplier ships the order
- You pay your supplier
My very first business was as an online florist.
I linked up with a brick-and-mortar florist who didn’t have a web store and created a florist website under my own brand. The pictures were supplied by the florist, so I didn’t even have to expend time and money on photo taking.
I marketed the website using Search Engine Optimisation (“SEO”) strategies, which meant my advertising cost was zero.
Whenever an order came in, the autoresponder on my website would automatically pump the order via email to the florist, and she would fulfil the order.
Twice a month, she would send me a bill at a percentage below the selling price, and I would keep the difference as my profits.
Drop shipping is a beautiful, Start Small, Scale Fast business model for the following reasons:
- Little or no upfront investment is needed. I didn’t need to have a brick-and-mortar shop front. I didn’t need to invest in any inventory. I didn’t have any running costs like payroll and truck rental. My only fixed costs were the website and payment gateway hosting and subscription costs, which was less than $200 for the entire year.
- Fantastic cashflow. All my orders were paid upfront, but I paid my supplier only 14 days later.
- Little or no effort is needed to run the business. The business could make money, even in my sleep. Somebody orders a bouquet of roses to be delivered to his girlfriend in the middle of the night, I get paid, and my supplier delivers the order the next day, all without me getting involved.
The challenge of drop shipping is that the size of the market may be small.
But that’s OK, you can get out of it as quickly as you get in.
You can just keep trying different products and markets until you hit the jackpot and find a blockbuster product, and then you scale that business quickly.
The online florist business was indeed profitable, but the amount of profit was small, so I got out of it eventually to focus on my core distribution business which had much more potential.
When you start the drop-shipping business, the brand of the product may not belong to you, and you could be buying from a retailer instead of a wholesaler due to the small value of your purchases.
But as you grow, you can start lowering your costs by going direct to wholesalers and factories.
With a stable stream of orders, you are now able to invest in inventory, which is no longer risky because you’re confident of clearing the stock.
You can eventually do white labeling, getting the factories to make products with your own brand on them.
Another guy I talked to last year had a great drop shipping business model that earned him a 5-figure income every month.
He used social media channels (mainly Instagram) to sell alcohol. His alcohol suppliers were all local wholesalers.
His customers place orders by messaging him and then send the payment by instant electronic bank transfer (it’s fast and free in Singapore).
He then bumps the order to his suppliers, who deliver the product the same or the next day.
He pays his suppliers regularly, either weekly or monthly.
This is a wonderful example of a drop shipping business! No investment is needed and there are no fixed costs.
He didn’t even have a website, so the cost of domain registration and hosting didn’t exist. But I did encourage him to start one so that he can automate his order processing and scale his business.
And he always got paid first before he paid his suppliers, so the cash flow was extremely healthy.
Drop shipping allows you to fail many times until you find the right product, without catastrophic losses. Thus, when you do find your blockbuster, you still have the financial resources available to scale the business quickly.
There are crowdfunding platforms like Kickstarter and IndieGoGo available now which give you access to funding without the need to give up equity.
If you have an innovative new product and you need funds to go into mass production, you can go to these platforms and find customers, who pledge an amount in order to receive the first batch of products at discounted prices.
Think of this as a massively scaled-up version of the pre-order concept I used in my textbook start small, scale fast example.
Crowdfunding is a viable alternative to venture capital. And it’s not just tech products that get funded. It could be a movie, a board game, a novel, or even a social campaign.
You don’t have to give up equity to raise the funds, you just have to get people to support your cause.
And if the funders are also making pre-orders, you have already secured the revenue for your first production run, significantly reducing your risk.
The only catch is that the amount of funds is limited. Ultimately, the venture capitalists are the ones who can fork out large amounts of money, 8-figures or more.
If the nature of your business requires such large investments, then crowdfunding may not fit your objective.
But if all you need to get launched is a 5- to 7-figure sum, crowdfunding certainly has a lot of advantages over investor funding.
We’ve all heard that you need capital to start a business. Nothing is further from the truth. There are many business models out there that don’t require a high amount of start-up capital, commission-based businesses being one of them.
Drop shipping is essentially a commission-based business too, because you have no fixed costs, and you make a profit only when you make a sale. The more conventional commission-based businesses are real estate and insurance.
Self-employed real estate and insurance agents typically earn a percentage based on the deals that they close. Some eventually scale up and create real estate and insurance agencies, hiring other commission-based agents to share part of their earnings, in exchange for other value-added services such as marketing and administrative support.
Technically, this concept can be applied to other industries as well. In fact, for a short while, I dabbled in logistics consultancy work, charging a commission payable by the logistics company if I won a contract for them.
Eventually, I chose to drop it to focus 100% on my fledgling distribution business, but I have come across other commissioned-based brokers who operate in the same way and managed to create an income.
It didn’t work out in the end, but then again, I didn’t lose any money either!
Trading (in Services)
Trading basically means “buy low, sell high”. I think most people already know and understand this business model. But do you know that it can be applied to services as well?
I started my logistics career under my first mentor, who was a master at this.
I was his accounts clerk, responsible for billing customers as well as processing suppliers’ invoices.
On the surface, this might seem to be an entry-level, dead-end job, but it gave me a fantastic overview of the business and let me understand how the money was made.
My mentor offered both warehousing and delivery services. He would win a contract from a corporate client to store and/or distribute the products, and then outsource the work back-to-back to subcontractors.
He would, for example, bill a customer at $3.00 per carton delivered and then pay his subcontractor $2.50.
He also worked with other logistics companies, who provided the full suite of warehousing services including inventory management systems, charging the customer for example $20 per pallet for storage and paying his supplier $15 per pallet.
A layman may think that this doesn’t make sense. Why would a client go through a middleman when he could go direct to the contractors at a lower cost?
What you must understand, however, is that business is about creating value.
Clients don’t have a problem with you making a profit, as long as the value you provide exceeds that profit.
My mentor was trusted by his customers and could be counted on to resolve problems that crop up.
He didn’t have to be the one doing the grunt work. He just had to be responsible for making sure everything runs like clockwork so that his customers could focus on their core business.
Also, he knew his target market. His biggest clients were overseas companies.
Local companies with boots on the ground can easily find local logistics companies to provide competitive quotes and get the lowest price because they know where to look and who to look for.
But someone located thousands of miles away doesn’t have the same advantages, and to them, having a trustworthy supplier is far more important than having a cheap supplier.
This, I believe, is one of the best start small, scale fast business models in the world.
A friend once told me, “The best product to sell in the world is information.”
He is a writer, not a businessman. But those words were burned deep into my psyche.
Unlike physical products, information cross borders easily. There are no shipping costs. There are no quality and warranty issues to deal with. You’ll never run out of stock or be affected by supply chain bottlenecks.
What better business can there be?
Google’s search engine is basically a provider of massive amounts of information. Entertainment, whether in text, video, or audio format, is a kind of information organized in a way that is meant to entertain.
There is a huge multitude of ways that information or entertainment can be monetized in a start-small, scale fast way.
A blog, like the one you’re reading now, is like an online book.
Mine is an informational blog, providing people with advice and stories about business, investment, economics, and motivation.
Just as you would expect from books in a library, there are about 600 million blogs covering all kinds of topics the world can think of. Blogs, like books, are generally either fiction (entertainment) or non-fiction (information).
You can monetize a blog through methods such as affiliate marketing, advertising, or selling your own products or services.
YouTubing, a favorite of youngsters, is like a video version of a blog. That’s why sometimes it’s called vlogging. Monetization methods are also similar to blogging.
If music is your passion, you can also create and sell your own music through platforms like Apple Music or Spotify. You earn when a certain number of people stream your music.
As an influencer, you make money from companies that pay you to promote their products or services.
Each of these topics is a whole subject on its own, and I don’t claim to be an expert in them.
But my point is, there are so many start small, scale fast ways of starting your business that you shouldn’t let the lack of money stop you.
It is not possible to Start Small, Scale Fast for all industries. Some businesses are naturally capital-intensive.
You can’t start an airline for little or no money. You can’t build electric cars without some serious money behind you. And perhaps the technology or product you are trying to create cannot be developed without first investing millions.
If the business is inherently risky, such as a hi-tech business, it is also good to bring investors in to share that risk with you.
For such businesses, obviously, a Start Small Scale Fast approach won’t work.
But this approach can be used for more businesses than you might think. You just need to be very creative.
If you want to be an educator, instead of plonking a 6-figure sum into a tuition center, why not start out as a home-based tutor? Use that to hone your skills, tune your pedagogy, and build your clientele first.
In fact, with COVID-19, many tutors have utilized video conferencing technologies to provide tutoring services remotely. Suddenly, they don’t need to commute and neither do their students.
Furthermore, their market has just exploded exponentially, because technically, their students don’t even need to be in the same country!
How about a yoga instructor? If you are fresh to the business, perhaps start out by working for others before thinking about having your own studio.
Learn the ropes of the business, build your regular clientele, and perhaps expand your influence through social media.
So by the time you do start your own business, you already have a foundation to start with.
Or perhaps you want to be a novelist. Instead of trying to get published the traditional way, printing several thousand hardcopy books that may end up stuck in a warehouse, why not start with an e-book?
Sell it on Amazon or your own web store and promote it online through social media instead of going through middlemen like publishers or bookstores.
The point is, if you are going to start a business in an industry in which you have no experience, it is better to start as small as possible. I have seen too many friends who went in without any experience and got themselves burnt.
People who start a restaurant because they went overseas, learned some exotic dishes, and thought that the market would share their tastes.
People who love drinking coffee, then start a café because they have been brainwashed to think (naively) that business is all about “passion” and “doing what you love”.
Well, passion and love are important, but it takes far more than that to make a business work.
Online vs Brick-and-Mortar
I would like to side-track a little and talk about online vs brick-and-mortar sales.
Having a physical store is a big overhead, but I see too many business owners having a retail shop without a clear strategy that makes sense.
I also see many entrepreneurs who limit themselves purely to online sales, for products that are more suitable for showroom sales.
In the new, internet-driven retail world, you must get rid of the “online vs offline” mentality.
Customers don’t care whether they buy online or offline. They just want to get the product they want, at the price they want, when they need it, and at the service level they require.
What you need is to have an “omnichannel” mindset, and merge both online and offline strategies into one cohesive strategy.
Before you open a physical store, you must be very, very clear about your objective. What does the physical store offer to the customer that you cannot offer online?
A physical store must be able to offer a kind of experiential service that cannot be delivered effectively online.
For example, personal services such as hair styling or dentistry are impossible to deliver online. People also don’t visit restaurants or cinemas just for the food or the show, they go for the ambiance, experience, and companionship. Otherwise, they can just turn to food delivery and on-demand streaming services.
Timing and convenience are also factors. If you get lucky and need to buy a pack of condoms immediately, are you going to buy it online, and then wait for delivery? Or it’s 3 am in the morning and you have a craving for ice cream, and there’s none in your fridge?
For such cases you would just pop into the nearest 24-hour convenience store and get what you need, even if it costs more, wouldn’t you?
If you sell products, there is an optimum price range for online sales to do well.
Avoidance of risk is one of the key reasons why a customer doesn’t buy from you. If your product is not a big-ticket item, online channels generally work well.
Customers don’t risk losing much money if the product turns out to be unsuitable, and many channels offer free returns anyway.
However, as the product gets more expensive, the risk of making a wrong purchase increases for the customer, so they will tend to want to visit a showroom to try it before they buy.
The best examples are cars and real estate. Most people will want to test-drive a car or see a show flat (or the actual property for resale units) before they buy. Some people do buy online, but the vast majority will not.
There is no fixed answer as to what the price point is before showroom sales overpower online sales, as it depends on the product and the market and is a subject for academics to study. But the general principle that expensive products sell better with a showroom remains.
But if you decide to have a physical store, it doesn’t mean you can ignore online.
The old mindset of locating your store in prime retail districts in order to benefit from the footfalls is going to be less relevant in the new retail world.
You must have an online presence and use it to drive traffic to your physical store.
With an “omnichannel” mindset, you could rent a store in a less expensive, but still easily accessible sub-urban area, then use online means to generate walk-in traffic for the stores.
If you think about it, the main reason why the rent in one retail location is higher than in another is the amount of footfall.
Why don’t you just pay less rent, and spend the savings on online marketing?
Starting small also means failing small. Start too big and the mistakes could be catastrophic.
And mistakes are all you are going to make at the beginning when you jump into a new industry.
This chapter is written for a certain type of entrepreneur.
One who wasn’t born with a silver spoon and doesn’t have huge financial resources.
One who isn’t a techie and can invent original products or write apps from scratch.
One who isn’t super ambitious and wants to be CEO of a huge company, but just wants to be well-off and be happy.
One who is more risk-averse and prefers the “slow and steady” approach of taking well-calculated risks, to a high-risk “all or nothing” approach.
One who cannot afford catastrophic mistakes.
If you are such an entrepreneur, then I suggest you stay away from those businesses where it is impossible to start small.
Look for something else within your means, and remember to Start Small, Scale Fast.m those businesses where it is impossible to start small. Look for something else within your means, and remember to Start Small, Scale Fast.
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