The myth of undercapitalization

In the average year more than 17 million people will become entrepreneurs, according to the National Association of Self Employed (NASE). By the end of their first year, 8 million of them will return to the corporate world because their entrepreneurial effort did not succeed. Many will say the businesses failed because of insufficient capitalization. Actually, under-capitalization is not the cause of failure, but a symptom of a far more serious problem.

Many experts will say that undercapitalization is the main reason for the failure of an entrepreneur to achieve the dream of having their own business. They will point out that failing entrepreneurs did not start with a large enough bank account to offset the period it takes before a business is profitable. Statistics always back up this theory because, sure enough, the money has run out before the business is profitable. Therefore, they argue, the theory must be accurate. Wrong!

The fact that capital ran out before a business is profitable overlooks other factors having an impact on capital. Yes, the business failed because it ran out of money, but under-capitalization is not the culprit. Let me explain.

In 1952, an interstate highway was built to bypass the town of Corbin, Kentucky. A small motel owner saw this as potentially the end to his business so sold off his entire operation to pay outstanding debt. Penniless, he took his first social security check of $105 and decided to use it to start a new business. With no other income, no savings to draw on, this small check represented his only capitalization. He developed a product and traveled through the area looking for restaurant owners that would sell it, giving him just five cents for each one sold. Twelve years later he sold his business for two-million dollars. Twenty years later the business would be sold again, this time for $840 million, with the stipulation this entrepreneur would remain the spokesperson. It seemed appropriate because the inventor, a gentleman by the name of Colonel Harlan Sanders, had become one of the most recognized people in the world.

Dave and Lucile moved into the first floor flat of a house at 367 Addison Avenue, Palo Alto, California. Soon, Dave would begin working part-time in their garage with Bill, who rented the cottage behind the house. Together they had $538 in working capital and a used Sears-Roebuck drill press.

Bill had been studying negative electronic feedback. They tinkered together and made a gadget they called the audio oscillator which they called the 200A "because we thought the name would make us look like we'd been around for awhile," says Dave later. The Walt Disney Company ordered eight oscillators, giving Bill and Dave’s company, Hewlett-Packard, the ability to grow into the corporation we know today.

These are two of the more prominent mega-companies that were under-capitalized when they started. Smaller companies share in success despite a lack of start-up capital.

Steven and Bennique Blasini started BFX Imageworks in Hollywood in 2001 without any capital. They lived off savings for six months and used their existing home computers to build their business. In a few years they grew into a multi-million-dollar company, winning awards for their cinematography work.

These people have proven the secret to success is not capital related. This is not to say that capitalization does not matter. In reality the secret to entrepreneurial success lies within each of us.

About the author:

Rick Weaver is a franchise owner and Executive Search Consultant with Patrice & Associates, one of America’s largest Staffing Specialist companies with over 175 offices across the United States. With 30 years of experience successfully placing managers at all levels of an organization, Patrice & Associates sets the Gold Standard of recruiting. Rick has personally worked with thousands of managers and management teams to strengthen their results.