What I Would Do Differently Starting a Business – The Trap of Start-up Capital

For me, I wouldn’t say ‘once bitten twice shy’ but ‘once bitten forever shy’. There are certain mistakes I made in starting out a business that I will not make again and that you too should not make if you really desire to start your own business and see it grow.

Sometimes we think all we need is capital and once we have the capital we are good to go in starting our business. Capital has become a trap for many start-ups more than it has helped them to scale up. If the supposed lack of it is not stalling the take-off of the business, the surplus might be hindering the sustainability.

I want to share with you my story of an investment I made in starting a farm and the lessons this has taught me in life when it comes to capital and starting a business.

I grew up in a family of agriculturally inclined parents. My late father met my mum in a school of agriculture where he was a lecturer and she was a student (you understand the gist). He worked as the General Manager (equivalent of MD) of several government farms such as Okitipupa Oil Palm, Araromi Ayesan Oil Palm and Araromi-Obu Rubber Plantation owned then by the Ondo State Government. Visiting my father in those plantations as a young boy could be compared to taking the kids of today to Disney Land. The sight of long stretch of palm trees or rubber trees and the big machinery at the processing plants were ecstatic.

My mother at a time ran the biggest poultry owned by the Ondo State government and visiting her office was probably the only excursions we had growing up in the days when TV stations were two and you had to wait till 4.30pm for them to start broadcasting.

I have related this background to let you know that I had inbuilt passion for agriculture. I was running my small poultry at home when I was in primary school along with that of my mum who was always giving out hens to people during the festive periods. I had my garden at the back of the house where I planted anything whether it would grow or not. I once planted processed rice not knowing it was not the one eaten that grows.

With this love for agriculture, I had always had it in mind that I would have my own farm. So I started a farm in 2009. I started with rearing cat fish with the plan to grow into piggery, poultry, grass cutter and eventually crop farming. Start-up capital was not a problem as there was constant flow of salary working in a bank as a Senior Banking Officer. I bought the land, constructed the fish pond, and hired two staff without blinking an eye. I invested millions of naira into the project and I had this feeling of accomplishment while doing all these because I was passionate about the business. Prior to starting the business, I had gone to learn about animal farming in the best place I could get the knowledge in this environment and I held nothing back talking to people who were already in the business including visiting their farms.

The farm was located after Ikorodu town in a place called Ogoji (Ogun State) while I lived in Lagos – Nigeria. During the week, I was a corporate banker, dressed in well starched white or blue shirt overlaid by a blue, black or grey suit and on weekends I was a cat fish farmer. I sold my Toyota Avalon, added some money and bought a Toyota Tundra suitable for my farm activities.

Some months into the commencement of the project, I invested another sum of money into setting up a hatchery. We started producing fingerlings to stock the additional ponds I constructed and to also sell to other fish farmers.

I trusted my staff and was open to them while I expected the same level of trust and openness. I tried to meet their needs beyond salary, giving out financial help from time to time.

After two seasons of harvest of my cat fish, I closed down the farm in July 2010. I managed to break even during the first harvest and I made a loss in the second. I still have the farm structure but I am currently not carrying out any farming activities.

I will not bore you with what led to closing down the farm but there are certain lessons I want to share with you so that you don’t fall into what I call the trap of capital.

Lesson 1

The first lesson is that it is good to bootstrap your business from the scratch rather than looking for interest based fund. I am alive to tell you my story today because I did not borrow money to start the business and I was able to cut down my losses by closing the business because I knew I would not have a sleepless night due to indebtedness to other people.

Never borrow money to start a business that has not been proven to generate income. Your business idea no matter how good is only a concept that needs to be tested at the initial stage. You have to look for a minimum viable product that you can afford using your savings or some cheap source of fund to test the market. If it succeeds and you have found a right model that works, then you can begin to look for equity or debt financing.

I will submit that in starting your business, it is not capital you need, but a business model that you want to test and see if it works. When you have a proof of concept, then you can go out looking for investors or you can decide to take a loan.

Many of us are deluded that we cannot start our business because we have no capital. This thought comes from a misguided application of the saying ‘money answers all things’. No doubt you need some money to start, but what I am trying to say is start your business within the means of funds you have and test that it works before going out to source for debt. It was good that I had my own money to start; it was also a disadvantage that I had money to start. You will find out why I said this as you continue reading.

Lesson 2

Having too much money at the start of a business could be a trap. I had money to start the business and I was spending it on the business without waiting to prove that I was doing the right thing. I had not started seeing the benefit of my initial investment and I went into another project of constructing a hatchery. Business growth is better when it is the business growing in capacity that is driving additional investment of funds but not when you are pumping money from other sources into it to expand especially when you have not reaped anything. You can fall into this trap when you have so much money. Many start-ups have failed despite being able to raise capital at the beginning because they spend the money on trying to grow the business when the business actually is not showing any sign of growth. It is like being caught in a hole and you keep digging to come out. The more you dig, the less your chances of coming out easily.

The decisions that could have been delayed and other alternatives that could have been considered in growing the business could be overlooked because there is money to spend on the most obvious options. I use less of creativity in growing the business that was yet to be profitable. I believe the business would do well by pumping money to expand it. I did not tell you about the money I invested in purchasing some equipment as I wanted to start producing my own fish feed. I was able to do this because I had money to spend but was it the right thing to do? Sometimes, not having the fund to start can help you come up with options that hitherto would not have been obvious when you have money to spend. This is further buttressed by the Abraham Maslow saying in the Psychology of science “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail”.

It explains what happens to us when we have more money and we realise that all of a sudden our expenses have increased. Our taste for things change and we believe we need to acquire them. The truth is, we have always survived without those things, but now that we have money, we think we cannot do without them. Many of the things that you think you need your start-up capital for have alternatives that are less costly, you should think deeply before you assume that you have to buy them.

When many of us think having capital is the handicap to starting our own business, we need to think again and check if we have truly exhausted all options to start without the much capital we think we need.

Lesson 3

We are often advised to go into a career or business that we are passionate about. As you would have observed from my story, I was passionate about agriculture; however I needed something more than passion to succeed in business and that is business acumen.

Over the years the question I asked my self is was I interested in raising cat fish or running a profitable business using cat fish as a product? The two are different and if I was interested in running a profitable business selling cat fish, I didn’t have to invest in building ponds and raising catfish. I could as well have identified the cat fish farmers and the large volume cat fish consumer and acted as a middleman between the two. That makes a lot of business sense. It is not that raising cat fish didn’t make business sense, but I should have considered my circumstances and started with a minimum viable product. I was available only on weekends and entrusted the management of my investment of millions of Naira into the hands of two people who did not have a dime of contribution into the venture. It was a wrong business decision to make and I paid dearly for it. My passion for agriculture and my desire to own a farm beclouded my business acumen. I could have employed just one of the two guys to help me scout round fish farms and arrange to make supplies to the large consumers without having to buy a square metre of land, build fish pond or make any of those investment and I would have been profitable. As a matter of fact, I may not even have any fund to do that because I could either request the consumer to pay me a percentage upfront to use to source for the fish or get the fish from the farmers on credit depending on my relationship with them.

Friend, don’t think passion alone when starting out, think also a viable business option. When you think of capital to buy machineries or some other equipment, ask yourself if that is really needed for you to make profit in the line of business. Can you rent, or even outsource that function to people that have the machinery without having to buy your own?

Let us be wise.

Lesson 4.

When you conceive your business idea, before you think of capital, think first of the market. Does your product or service have a sizeable market? Who are the key players in the market? How do they make their buying decision? Who has more power, the seller or the buyer?

The cat fish market in Lagos environment is dominated mostly by a market women cabal. They move in droves to a farm during the time of harvest and they dictate their buying price. Most farmers who don’t have other options to dispose their fish have to succumb. That was my experience.

I was investing so much money in the farm without having a firm sales strategy for my product. My market size was not expanded beyond the cabal and I had to succumb to their price. Imagine if I had taken loan to start the business.

Don’t be too excited about raising capital, first think of how and if your product will sell. You will lose your investment if you don’t tidy up how your product will exchange profitably for money.

Lesson 5

Where you are putting down your money in a business, you must have a strong control system. I trusted my worker so much and I used to transfer money into the account of my farm manager to purchase fish food. Dear, trust is good but if you don’t want to tempt people, put a control system in place. My fish were underfed because my manager was siphoning money into private use. If I would start all over again, I would not do that.

Lesson 6

You must have a financial and accounting system before you start your business. I do not mean record keeping, I am referring to being able to do a financial model of your business to know what you have to invest over a period of time, what your cash flow should look like and at what time the business will break even.   As I had money to spend, there was no check on what had been invested and what not to invest until certain conditions were meant. I had no tool to help me with making a wise business decision though I was keeping record of my expenses.

At the minimum, your business must be well planned with tools to help you make key decisions on investment. You must have financial scenarios that tell what would happen if certain steps are taken in the business. You must know how every dime you put into the business will have an impact on the business so that you don’t just keep spending money and not getting any value for it.

Just as having capital could be a trap, not having could be as well. In starting your business, think first how to prove that your idea can generate income with a minimal investment which comes mostly from you. This may not be in form of cash, but in your approach to the business. You probably don’t need a quarter of the start-up capital you think you need now.

I will tell more about how you can start your business with little or no money.

Stay blessed.

Akindele Afolabi

Ps. The story of my farm is not a fiction, it is a true life story