How to Start a Business with No Money

Posted April 8, 2009 04:35 PM (EST)

How to Start a Business with No Money

Is it possible to start a business with little or no money? Absolutely. In fact, back in 2004 that's exactly what I did. I launched World 50, investing only $400.00, and that was to buy stationary to print invoices.

This was good news for me, because I had no money. Zilch, nada, goose egg, the bagel. And I quickly discovered that investors don't want to invest in you anyway until the model is proven, and then take everything for their investment. Bad idea, particularly if you don't have a track record.

I learned that with the right approach, starting a business with no money is not only possible; it results in a better company. Here are some tips:

1) Live off your current job as long as possible. There is no reason you cannot explore and experiment through your entire first year of launching a new business while holding down another full time job. The first year is about ideation, about coming up with bad ideas and letting other people explain to you why they are bad, and how they can be better. You can nurture and grow the idea, and also build the initial wave of enthusiasm with prospective customers and employees all while moonlighting.

Got fired? Even better. After the first few weeks of a job search, no one can spend 50+ hours a week focused entirely on finding employment. Think Jack Nicholson in The Shining. Use your non-search time to gestate and spin-up a new idea. It's healthy, and may really lead to something. This is what happened to me.

2) Let your customers fund your working capital. This is key, although it is not possible for every business model. Developing, testing and manufacturing many products requires significant capital up front. But for a service business, it is much easier. My company sold annual subscription memberships to executives. The fees were required to be paid up front, but our costs were not incurred until months later. With no salary (living on a couple months of severance) and no immediate expenses, we quickly built up a bank account of $300k and rising.

Even if your idea does require making a product, it can be launched inexpensively. My good friend, Sara Blakely, started the amazingly successful company Spanx with less than five thousand dollars. She researched and wrote most of the patent on her own (using attorneys for the clean up), then begged and borrowed to find a plant to make her prototype. From there, she lined up orders, and the cash flow equation fell into place.

3) Outsource your sales department. You can't afford to hire (or commit to) high-ticket sales people. Find companies who already have a relationship with your target customers, and rope them in. World 50 sold to the highest level executives in world, and I had a small problem - I didn't personally know a single one! But I was able to talk Accenture, Bain, Omnicom, WPP and others into making all the introductions for me - all I had to do was close the sale.

In fact, these partner companies quickly became so excited about my new business that they donated all of our branding work, technology development and PR - and each actually paid me $50,000 for the right to do so! Now that may be hard to replicate, but if you can find ways to get your partners excited, you can get them to contribute.

4) You don't need to give away equity. Many people I have spoken with think that if you don't have cash, then the only way to launch is to give away lots of equity - to partners, to employees, to initial customers. Not so. I seriously considered giving our first customers and partners equity in the company to get them to participate. But as it turned out...they didn't want it! Customers could easily sign up and write me a check, it was a simple transaction - but if they received even one share of equity, it went to their legal department - and good luck wading through that mess. As for my service provider partners? They just wanted to participate in what my company was doing, and NOT have any brand liability in case I screwed things up. Take the high rode. I kept 100% of the equity.
***
In the end, launching a company with no money will force you to

1) build a better model which has sustainable cash flow right out of the gate - one of the most important things,

2) truly engage your partners - you are unlikely to succeed without them (money or not), and

3) retain control! You need to steer the ship, not your partners or customers, and certainly not your external investors ("Hey Rick, it's been 3.5 years - time to sell!").

The bottom line is this: If you can't earn the interest and attention of customers, partners and employees, you WON'T be able to buy it. And if you can, then why pay for it?

This post was originally published at RickSmith.me