Capital Efficiency: How to Build a F500 Enterprise from Scratch (F500 Handbook)

Updated: January 29, 2010

In today's economic climate, small businesses certainly face greater capital constraints. But there's an interesting trend that receives a lot less attention - small businesses require much less capital than before. In other words, today's business dollar goes a lot further than it used to.

This is certainly true in information or digital industries where trends such as cloud computing, online communities, and open source are driving costs down significantly. Take game development as an example. In the offline/retail world, it might take $30M to develop and market the game. In the online world, even wildly popular games like Friends for Sale require less than $1M to develop and market. But capital efficiency isn't merely a digital phenomenon. Even "offline" businesses require less capital as they source goods and services from all over the world through sites.

Here are ten specific tips on how to run a capital efficient business:

  1. Fundraising 2.0 - Businesses that require outside capital can now raise money in increments that fit even the smallest of businesses. They can also do this in a streamlined manner, avoiding what has historically been a labor intensive affair requiring a lot of personal networking and not-so-straightforward financial vetting. Now early stage companies can raise debt via peer to peer lending services like Prosper or small amounts of venture capital from firms like Y Combinator. The amounts raised can vary, from thousands to hundreds of thousands of dollars, depending on your businesses requirements.
  2. Sales hiring and the unit of one - Building a high quality sales organization is an expensive proposition, particularly if you are trying to aggressively scale your business. To help manage the costs associated with building a sales team, make sure you use a couple of tactics. First, hire a single sales rep and see if they can sell somewhat self sufficiently. Learn as much as you can from this first rep's experiences (what does a typical sales cycle look like, what tools does the rep need, how many accounts will the rep be assigned…?), but most importantly understand how long it takes the rep to make a positive cash flow contribution to the business. Second, now that you understand the cash flow metrics behind a typical sales rep, build a "unit of one" model that encapsulates those metrics. Now you can hire additional reps with a decent understanding of what reps are expected to produce in terms of cash flow and bookings. If the unit of one model works, scale the team. If it doesn't, think about retrenching until you can tune the model.
  3. Leverage a modular, global workforce - There are now over 9 million temporary workers in the United States alone. And then there's the global workforce that is now available to U.S. businesses because of globalization and the internet. While that might not be a comforting fact for many economists, it's a resource that small businesses can use to access specialized skills and labor at low costs. Almost every skill required to build and run a business is now available on an a la carte basis. Skills range from the engineering resources available on sites like oDesk to on demand customer service from companies like LiveOps.
  4. Performance oriented marketing - Marketing campaigns used to be an expensive affair, often requiring expensive agency work for the creative work and media buying - and that was just to get the campaign live. And when the campaign was live, there were no guarantees regarding whether it would work. Now, there are countless performance based marketing options available to small businesses that require only lightweight creative work and media planning. Furthermore, campaigns can be measured in real time, turned on and off at will, and paid for on a cost per action basis. Of course, Google AdWords is the best known of these options, but there are many other solutions available to even the smallest business.
  5. The contract to cash cycle - It sounds mundane and tactical, but understanding the specific steps that your business will have to take to get from contract (that is the time that a contract is executed that guarantees you payment) to cash (that is the receipt of the payment guaranteed by the contract) can yield capital efficiency improvements. Once you understand these steps, you can optimize how to shorten a contract to cash cycle from months down to weeks or even days. For example, a good best practice is to make sure that your sales organization identifies a point of contact in the customer's finance organization for your finance team to work with directly. For more information on the contract to cash cycle, see Tips to Improve the Contract to Cash Cycle.
  6. An abundance of inexpensive technology - Whether it's software as a service, cloud computing, open source, or ad sponsored software, most technology that a business needs is available at an extremely low cost compared to historical standards. With hardware, software, bandwidth, and storage costing 1/10th of what it cost ten years ago according to some observers, small business can now take advantage of enterprise class applications and services to support all of the major business functions. From obvious applications such as CRM software from Salesforce.com to more arcane services such as community powered customer service from Get Satisfaction, enterprise class functionality is now available to all at a low cost.
  7. A community of experts - Before the advent of so many online communities, businesses would have to hire consultants or engage with vendors when looking for answers to specific business or technology questions. Now a plethora of experts are readily available to provide ad hoc support to small businesses everywhere at no charge. You'll find expertise available for really specific challenges like defining lead nurturing as well as more general issues that all businesses face like common mistakes made when starting a company.
  8. Rapid prototyping - It's now possible to develop and launch products and services in a matter of days or weeks. Amazon EC2, Rackspace Cloud, and other cloud computing offerings make application/service development and hosting easier than ever. And while many of these capital efficiency tips center around the internet, there are also developments in the purely offline world that are enabling small businesses to be more capital efficient. One of the more exciting advances is the emergence of "desktop manufacturing" technologies that allow small businesses to develop three dimensional prototypes using nothing more than a PC and 3D printers.
  9. Low cost suppliers - While globalization has enabled western businesses to source supplies from manufacturers in Asia for some time now, a new set of tools is allowing small businesses to take advantage of these low cost suppliers. The most notable is AliBaba where businesses can find and engage with literally hundreds of thousands of Asian suppliers across a host of business products.
  10. Online collaboration - Online collaboration tools make it easier than ever to communicate with partners and customers without having to incur traditional communications and travel expenses. Free services like Skype go a long way toward offsetting international telephony expenses while collaboration tools like Adobe Connect actually allow for interactive meetings with features like whiteboarding.
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