Just for starters: build a big company from $20,000

ELJO.com.au founder Elliot Ramler gives new meaning to the concept of learning by doing. In his final year at university, he sat at the back of the class and, in a hushed voice, took occasional client orders over his mobile phone while avoiding his lecturer’s gaze. As other students studied business theory, Ramler built the bones of a million-dollar online shopping venture.

Launched with just $20,000 in 2008, ELJO could not afford offices or staff. Ramler and co-founder Jonathon Green had to take orders for ELJO’s electrical goods wherever and whenever. The company now employs seven people, turned over more than $2.7 million in 2010-11, is aiming for $5 million in 2011-12 and secured its first two investors in June.

Ramler and Green, both 26, are well on their way to becoming millionaires after four years in business. The pair saw an opportunity when they found it difficult to order a digital media player from overseas. Each chipped in $10,000 of their savings, spent a week researching and writing ELJO’s business plan, then barely earned a wage for two years.

“We didn’t have a clue what we were doing at the start,” Ramler says. “But we learned more in the first month running ELJO than in three years at university ... Having hardly any capital at the start was an advantage, because we knew if the idea failed we could start again.”

ELJO’s success might seem more good luck than good management, but Ramler, Green and a host of other young business owners are rewriting the rules of start-up entrepreneurship and turning traditional notions of business planning and capital-raising on their head.

They are building multimillion-dollar ventures with hardly any start-up capital and embracing the concept of “lean entrepreneurship”, which is a radically different view of how start-up ventures succeed and one that is becoming more popular in the United States and Australia.

In some ways, the theory of lean entrepreneurship is almost the opposite of traditional business planning. Even though most start-up ventures fail, many universities still teach students to research and evaluate opportunities in detail, determine a business model in advance, write an elaborate business plan, raise capital and focus on just one venture.

This makes sense when the venture has a clear business model and established customer base, or where high start-up or fixed costs require elaborate planning and more traditional business thinking. But start-ups such as ELJO that seek to disrupt established markets, in it’s case shopfront retailing, are often in search of a business model.

Put another way, they don’t know where they are headed at the start.

In turn, it makes little sense for a venture such as ELJO to engage in elaborate business planning over several months, try to raise large slabs of capital, or invest in brand development or hiring staff, when everything could be different within months of launching.

ELJO’s business model changed each quarter in its first year as it realised the initial concept – selling digital media players online – was too narrow and needed to sell a wider range of electrical goods to survive.

The notion of lean entrepreneurship, pioneered by US academics and entrepreneurs such as Steve Blank and Eric Ries, has two valuable insights. The first is that start-up ventures are not small versions of large companies. That is, traditional business thinking designed for large companies, and often taught to managers through MBA programs, does not always suit entrepreneurial start-ups that operate in conditions of uncertainty and chaos.

The standard response to uncertainty – more planning – is in many ways counter-intuitive if it reduces the flexibility of entrepreneurs with potentially disruptive innovations.

The second insight is that start-up entrepreneurs are in search of a scalable, repeatable business idea. They are, in effect, launching a hypothesis rather than a product set in concrete.

The entrepreneur’s great skill is getting an idea to market quickly, testing it, listening and responding to customers, letting the market shape the business model, and being prepared to change all or part of the model rapidly.

Successful entrepreneurs might see little that is new in this approach. They have always taken chances, been close to their customers, and changed their business models and products on the fly. What is new is the growing number of entrepreneurs who are embracing this approach and recognising that, in certain markets, little capital at the start might even be an advantage.

The 2012 BRW Fast Starters survey, which is based on detailed responses from 100 fast-growing start-up ventures, shows how emerging enterprises are embracing lean entrepreneurship.

One in 10 companies on the list started with $5000 or less in capital. Another 12 BRW Fast Starters began with between $5000 and $20,000 in seed capital and still built multimillion-dollar revenue.

This data does not show if the owner part-funded the venture using cash flow from an established business, or if the venture had clients at the start or customers willing to underwrite early sales. But it suggests the biggest obstacle to start-up entrepreneurship – capital – is gone in some markets as the internet obliterates more barriers to entry and slashes business costs.

If it continues, this trend could have profound implications for entrepreneurship in Australia. For years, entrepreneurs have complained about poor access to venture capital funding and bank debt, and how they must finance ventures using personal savings, credit cards, or loans from “families, friends and fools”. Lower funding requirements should, in theory, mean more entrepreneurs can start ventures, retain more equity, and have no or fewer shareholders to worry about.

The lean entrepreneurship trend could also lead to more young entrepreneurs, such as Ramler and Green, wanting to create their job – rather than apply for it – upon leaving university. And it could see more entrepreneurs embrace what prominent global business thinkers such as US professor Gary Hamel have argued for years: that more companies should have a portfolio of “experiments”, take small bets, and juggle multiple streams of innovation, some incremental and others disruptive.

Perhaps the best sign is that a new generation of entrepreneurs has a different attitude to failure. Another BRW Fast Starter founder, Neil Singh, started the online furniture retailer Fidarsi Furniture with $10,000 after doubling his capital playing roulette. “I’m not afraid of failing or starting again,” Fidarsi told BRW earlier this year. This attitude is light years away from older generations of entrepreneurs who worry about the stigma of business failure and so take fewer risks.

It is not just 20-something entrepreneurs who are building successful ventures with tiny capital. Cohort Digital founders Malcolm Treanor and Marcelo Ulvert started their booming digital marketing business with $37.50 – enough to open three bank accounts. They secured a few cornerstone clients and about $18,000 in guaranteed sales, but that is still low by start-up capital standards.

Cohort had $2.24 million revenue in 2010-11, up 79 per cent on a year earlier. After careers in small business consulting and digital marketing respectively, Treanor and Ulvert, both in their 40s, saw an opportunity in 2008 to help companies more efficiently capture online leads and engage in email marketing.

“We never really thought about raising capital,” Treanor says. “For us, the key was getting to market quickly because we could see companies were getting ripped off in digital marketing, and we knew we had a good product.

“Our entire focus at the start, and since, was doing what we would say we would do. In some ways I think our focus could have been diverted if we had more capital at the start, because we might have tried to grow Cohort faster.

“We will look at other ventures in time, either within Cohort or outside it, and take a similar approach of staring with very little capital. It forces you to get to market quickly and launch a product that has early cash flow.”

Treanor’s comments about the downside of start-up capital at the beginning seem at odds with the vast number of entrepreneurs who are desperate for capital to grow their ventures. It is not that he or other BRW Fast Starters do not want capital; rather, it is a matter of timing.

Having too much capital at the start, when the entrepreneur is in search of a business model, and learning and discovering what works, sometimes leads to start-ups making bad decisions. The temptation is to spend capital on marketing and hiring staff, and make other big investment decisions even though the business might fundamentally change within months of it’s launch, and need different staff and branding.

A better approach is often raising capital once the venture has settled on a scalable and repeatable business model and needs to invest heavily in systems and structure to support rapid growth. Under the lean entrepreneurship model, more aspiring business owners, especially those with online ventures, are launching their so-called minimum viable product (MVP), with minimum capital. If it fails, little capital is lost and the entrepreneur can quickly start again on their next venture.

Haylix co-founder Michael Richardson believes the fast-growing, managed, web-hosting venture, which has successfully expanded into data storage via cloud computing, would have made very different decisions had it started with a few million dollars in funding. “We had to be a lot smarter about how we grew the business,” Richardson says. “If we had $2 million in the bank, we would have almost certainly tried to grow faster, even though our approach was always to build something that was sustainable, rather than a business that skyrockets in the first quarter after launch and then falls apart.”

Backed by STW Communications Group, Haylix was spun out of another marketing business, DTDigital. It had a handful of clients when it launched in 2010, but only made a small monthly profit. “The first few years were very lean,” Richardson says.

Haylix turned over $1.4 million in 2010-11, up 56 per cent on a year earlier, and expects continued strong growth in 2011-12. The business acquired more data-storage infrastructure, opened a Hong Kong hosting facility and upgraded its Sydney facility. It is buoyed by the potential of cloud computing and the belief is that it can grow faster in coming years as more clients use its services and average revenue-per-customer keeps rising.

Curve Group co-founder Dylan Flavell started the management consultancy in 2008 with less than $5000. Like other professional services firms, Curve began with a small group of clients that provided early cash flow.

Flavell and Curve’s other founder, Christopher Nguyen, saw an opportunity to go out on their own after having successful careers at PwC, to start a consultancy around people management and process.

“We considered at the start whether we needed an office with a prominent address, brand advertising and public relations, an investment in proprietary tools, and if we needed to raise significant capital,” 32-year-old Flavell says. “But we wanted to focus on building our relationships with existing clients rather than trying to win new ones. And we wanted to be informed by our market before we rushed into raising capital, investing in branding and hiring staff. For us, it was about building our capability first before chasing rapid growth.”

Curve Group’s steady approach is paying off. It has a dozen full-time staff, eight associates, and turned over $1.78 million in 2010-11.

Flavell hopes it will grow by 20-30 per cent this financial year and expects faster growth as it scales its intellectual property and business model.

Not only consultancies and technology companies are starting with tiny capital. Auto King Mobile Mechanics started in 2006 with less than $5000 – enough to buy an old Citroen van, paint it and plaster it with company stickers. Founders Peter Hill and Jay Luckie had a motor vehicle finance brokerage and used some of its small cash flow to help fund Auto King, which was launched to provide car safety checks and has since expanded into mobile car servicing.

They found a mechanic who wanted to be Auto King’s first licensee and the business grew from there. It now has a fleet of 18 vehicles, and a mix of licensees and franchisees who pay low or no advance fees to operate an Auto King business, in return for a slice of their revenue.

“The business was very lean in its first few years,” Hill says. “We had a lot of problems finding the right people, because neither of us were mechanics. We just wanted to find one small business idea that was profitable and had low risk, and grow the business out of cash flow.”

Auto King turned over $1.1 million in 2010-11 and Hill believes it will double the size of the business in 2011-12 and again in this financial year.

Hill and Luckie hope to expand the Queensland-based business – a minnow still in the mobile mechanics industry – into NSW and Victoria, to begin selling master licences for territories, and aim for triple-digit annual sales growth. “Not being mechanics, we didn’t know if Auto King would work at the start, so we never thought about raising lots of capital when everything was uncertain,” Hill says.

It’s an approach that more entrepreneurs are following by the day. Like Auto King, ELJO’s Ramler and Green got their product to market quickly rather than spending months researching an idea and begging investors for funding.

After years of expensive university education, they realised that start-up entrepreneurship is not about what you know, but how you adapt to the unknowable, and how to build multimillion-dollar ventures on capital investments that would barely cover the cost of a few university subjects.

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