Fast Company

Undercapitalization Can Be Cool

If you are crazy enough, that is. One of the leading reasons that new businesses fail in the first few years of their start-up is due to undercapitalization. Undercapitalization spawns from entrepreneurs often not knowing what in the fiery furnace of paperclips sales they are doing or simply having cheap investors. This often places the entrepreneur in the real fiery furnace of displeased creditors, expecting employees, and sometimes angry family members/business partners.

However, often it's overlooked what genius the proper utilization of undercapitalization can be. Crazy talk? What if the marketing strategy is "We're going to go into this mess without enough money to start." Seems kind of... stupid... but think about it. The main reason for undercapitalizing is the restriction of a low budget or stinginess among owners' with their personal financing funds. But having little money happens. And so does the tendency to penny-pinch for some individuals.

We've all heard of entrepreneurs who can make a dollar stretch a long way, and the truth is, many companies waste a lot of money on unnecessary things. For example, when two businessmen go on a trip to Alaska to meet with an important client, they will stay in separate rooms. If you have the capital... awesome. But, if you are being frugal, this is wasting funds. "But that's madness!!" some people would proclaim. Hey, rumor has it, Wal-mart does it. Okay, bad example.

Sometimes companies will rent office space in the finest part of town instead of in a moderately priced area. In addition to wasting funds on travel expenses, companies will over spend on supplies, business cards, promotional posters, advertising stickers when they could order online from a company like Vistaprint.com and get thousands of cards under $15 in addition to other great promotional products at a price that really puts a bang to the buck. When entrepreneurs aren't in the know, these things can add up to thousands and can be the tipping point in the first few years of business. Some companies even still waste thousands in ad advertising and overlook the all-powerful Google SEO marketing. Not to say print-ads are a dead-end, but to overlook Google (and it's scary to say this) is almost suicide.

All this is to say, for the weather-eyed entrepreneur with careful spending (but not too careful to a point of just being annoying), being cheap and undercapitalizing can make or break a company and in the second or third year of business, executives won't have to sleep in the same double-bed suite and can get the Hilton in Manhattan rather than the Ramada in Jersey City.

 

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3 Comments

  • Mercedes Jorge

    Undercapitalization has kept me from carrying thru with many start-up ideas I have had. However, thanks to your comments, I think that I will dive in with caution. For years I've seen entrepreneurs carry out ideas, including my mother who is on her 6th business venture, currently running two successful businesses all on her own funding. However, the thought of failing due to funding is a scary thought for me and has always been. I've worked since I was 13 and have no plans of wasting my hard-earned money on the Ritz-Carlton! So thank you for taking the time and typing up some words of wisdom for us rookies trying to take a leap.

  • Jo Nelgadde

    Undercapitalisation really defies logic unless it's self-imposed undercapitalisation "to prove a point". In today's world where innovation and entrepreneurship are very much encouraged, there are many avenues entrepreneurs can turn to in order to secure much needed financing.

    One thing that cannot be stressed enough when it comes to entrepreneurial finance is the concept of leverage. The old adage couldn't be more apt - no pain, no gain. Financial leverage, to put it simply, is using financial resources to increase (or decrease) potential returns. This effectively means that entrepreneurs have a real incentive to go out there and sweat to get financing. As the old adage says, there is pain to get that gain. Financing can be expensive, especially with venture capital or giving away huge chunks of your equity to a stingy partner. But the entrepreneur must give serious thought to leveraging the acquired funds rather than sitting back and thinking he can achieve it all by himself.

    As Michael, the author of this blog post has pointed out, personal financing is a cheap way of financing a venture and indeed, entrepreneurs should exercise caution when managing cash flow, particularly when their hard earned life savings are at stake!

  • Carel Two-Eagle

    Undercapitalization promotes creativity due to necessity being the mother of invention.. My Elders taught me, "any dummy can spend money; it takes real talent to make money stretch "and" grow your business".
    I come from an emmigrant and blue-collar background on the non-ITI side; I'm the first person in either side of my family to go to college.
    I worked my way through, and funded not only my degree+, but every one of my businesses from within. Which means, every one of them was under-capitalized from the start.
    My largest effort to date kept me and 17 men working for the best part of 20 years.. Couldn't-a been too bad an idea, then, hm?
    If nothing else, it cuts overhead to a minimum; eliminates temptation to overspend (you can't spend what you don't have); and (to repeat) it promotes creativity and determination.
    But then, nothing worthwhile was ever accomplished without determination..