The Myth of Capital - The Khuram Dhanani Blog
437
post-template-default,single,single-post,postid-437,single-format-standard,bridge-core-3.0.1,qodef-qi--no-touch,qi-addons-for-elementor-1.7.6,qode-page-transition-enabled,ajax_fade,page_not_loaded,,qode-title-hidden,qode_grid_1300,qode-content-sidebar-responsive,qode-child-theme-ver-1.0.0,qode-theme-ver-28.7,qode-theme-bridge,disabled_footer_top,qode_header_in_grid,wpb-js-composer js-comp-ver-6.8.0,vc_responsive,elementor-default,elementor-kit-12
Khuram Dhanani

The Myth of Capital

You No Longer Need Mountains of Cash

Over-the-top multi-million dollar fundraising stories from charismatic Silicon Valley entrepreneurs often make headlines. The stories usually involve venture capitalists backing high-risk, innovative ideas put forth by well-connected young entrepreneurs with degrees from Stanford, Harvard, Yale, Google, and Facebook.

Don’t buy into the hype. Fundraising is NOT a necessary step for starting a new business. With readily available technology and extremely low barriers to entry, you can start a new venture with almost no money. With some e-commerce businesses, you can get started with just a few dollars for the essentials (domain, hosting, website, etc.) plus your own time, perseverance, and problem-solving abilities.

The Dark Ages

Before the existence of the Internet, smartphones, low-cost computers, and ultra-fast download speeds, starting a business required a large amount of capital. If your grandparents wanted to start a new business, they had to accept considerable risk. It took lots of money, faith, and courage to face truly massive barriers to entry and heartbreaking business failure rates. 

Imagine opening a retail store before the Internet existed. You had to have the cash to lease a space, guarantee your rent for a set period of time, acquire an occupancy permit, buy shelving, inventory, and equipment, afford maintenance, custodial, and office supplies, hire and train employees, develop systems for inventory control, ordering, and payroll, make deposits for utilities and figure out where customers and staff could go to the restroom. You either had to have a kind and wealthy relative, take out a loan, sell equity in the business, or go in with partners who could scrape together their share. After all this anxiety and heartache, the odds were that your business wouldn’t last more than a year or two. 

In those days, the opportunities were minuscule, the barriers significant, and the risks were enormous. This is where the reality of needing to be capitalized got started. You needed mountains of money and there were no guarantees you’d wind up with a going concern.

Fortunately, those frightening days are long gone thanks to our having access to powerful technology. Knowing this, you’ll never take computers, smartphones, or high-speed Internet for granted ever again!

To illustrate just how much times have changed, let’s take a quick look at some of the most famous entrepreneurs in American history.

Andrew Carnegie

Carnegie was a Scottish-American industrialist who led the American steel industry’s expansion in the late 19th century. He became one of the richest men in history, growing his wealth to a net worth of over $372 billion in today’s dollars. He accomplished this in a true rags-to-riches fashion. 

In 1848, when Andrew was 13 years old, the Carnegie family emigrated from Scotland to Pittsburgh. In the 1850s, Carnegie began his climb to wealth and power by working entry-level jobs, starting in a factory’s boiler room and rising to a messenger in the telegraph office.

His position as a telegraph messenger allowed him to meet Thomas A. Scott, the Pennsylvania Railroad’s western division superintendent. Carnegie was a hard worker with an eye for opportunity and a keen ability to connect with people who could help him become successful.

Because Scott was impressed with Carnegie’s work ethic and thirst for knowledge, Scott alerted him to the sale of 10 shares in the Adams Express Company and gave him $500 to buy them. Upon receiving his first dividend check of $10, a gain of +2%, Carnegie became hooked on investing. Using his paychecks and his dividend income, he invested in railroad-related businesses, then oil, and still later, a wide variety of businesses in the steel industry.

Eventually, he built his wealth to a point where he was able to purchase entire steel companies. This led to Carnegie Steel Corporation’s formation in 1892, which he later sold to J.P. Morgan’s U.S. Steel Corporation in 1901 for $480 million. 

Carnegie didn’t need capital to get started … the real capital was in the power of his mind.

Henry Ford

Henry Ford started his career in 1891 as an engineer with the Edison Illuminating Company of Detroit. He worked his way up to Chief Engineer in 1893, which gave him enough time and money to work on some of his own ideas. In 1896, Ford developed his first self-propelled vehicle, the Ford Quadricycle. From there, he brainstormed several ways to improve this initial creation.

Ford soon developed a second vehicle and then left Edison’s company to start the Detroit Automobile Company with the help of financial backing from Detroit lumber baron William H. Murphy.

Ford would go on to design, build, and successfully race a 26-horsepower automobile in October 1901. With this success, stockholders in the Detroit Automobile Company formed the Henry Ford Company. Ford decided to leave the company and it was renamed the Cadillac Automobile Company.

Soon, with the financial help of Alexander Y. Malcomson, a Detroit-area coal dealer, Ford & Malcomson, Ltd. was formed. They leased a manufacturing factory in a deal with John and Horace E. Dodge. Sales were slow, and the Dodge brothers needed to get paid for their first shipment.

To resolve this issue, Malcomson brought in a group of investors and convinced the Dodge Brothers to accept part ownership in the new company, which was renamed the Ford Motor Company.

Shortly after, Henry Ford built and sold the Model T, which led to the development of the first assembly line for the mass production of automobiles. The effect of this and other efficiencies catapulted the company into success and turned Henry Ford into one of the world’s richest men.

Again, the only capital Ford had was in his mind, and he turned this resource into great wealth combining his ideas with other people’s money.

John D. Rockefeller

John D. Rockefeller started his career as an assistant bookkeeper at the age of 16 and quickly gained traction as an entrepreneur after engaging in several business partnerships. 

Rockefeller started the Standard Oil Company in 1870 and his wealth increased as kerosene and gasoline became important. At its peak, his company controlled about 90% of all U.S. oil transactions. Additionally, Rockefeller gained control over the domestic railroad system that transported his oil.

His near-monopoly drew the ire of the Washington establishment, which filed antitrust lawsuits resulting in Standard Oil being split into 34 entities. These became some of the businesses we know today, including ExxonMobile and Chevron. 

To this day, the Rockefellers are still among the wealthiest families in the world, and their business empire began with no capital. Do you get the point? Of course!

The Shift to Modern Entrepreneurship

The nature of business in the days of Carnegie, Ford, and Rockefeller required a large amount of capital. Entrepreneurs had to work their way up, make connections with the right people, and slowly build their wealth to start a business of their own. These early entrepreneurs needed other people with money to believe in them, their products, and their business savvy.

With the Internet, there are many opportunities to start businesses with little or no capital. Modern entrepreneurs such as Bill Gates, Steve Jobs, and Mark Zuckerberg started their companies in garages and dorm rooms with nothing but sweat equity. Once their ventures took off, they raised money to grow their businesses, but this is different than requiring capital to get started.

Many companies have never raised external capital, yet eventually made their founders rich. Here are some modern examples.

MailChimp

MailChimp is a software platform that allows businesses to send marketing emails to subscriber lists. The company started in 2001 as a side project that was funded from the proceeds of various web-development tasks accepted by the founders, Ben Chestnut and Dan Kurzius. Today, MailChimp is one of the leading email marketing platforms, sending billions of emails every day and making its founders worth billions of dollars. 

ClickFunnels

ClickFunnels is a Software as a Service (SaaS) platform that allows users to quickly create sales funnels for digital or physical products, for signing-up webinar attendees, offering online courses, and for anything that can be sold through a sales funnel. Users include online teachers, musicians, and retailers of all kinds who are looking for an easy way to sell their products or services and make money online.

Founder Russell Brunson, a Boise, Idaho-based entrepreneur, started and self-funded the company in 2014. Without ever accepting outside investment, Brunson leveraged his storytelling skills to grow the company into a $360 million SaaS business.

GitHub

GitHub is a web-based hosting service for software development projects and was founded and bootstrapped by Tom Preston-Werner, Chris Wanstrath, and PJ Hyett in 2008. The company started as a weekend project. Its founders spent their own money to acquire the domain, set up hosting, and build their service.

The platform was popular, and by 2013 GitHub had over 3 million users. The founders quit their day jobs and focused on their company full-time. Based on customer feedback, the company’s products and services were refined and in October 2018, GitHub was sold to Microsoft for $7.5 billion without ever taking a penny of external capital.

Busting the Myth

As you can see from these technology startup examples, starting a business today doesn’t require massive amounts of capital and connections. Suppose you want to set up an e-commerce business. You can buy a domain for $10, create a website with a $39/month Shopify subscription, and pay for inventory as it’s ordered with dropshipping services like Oberlo, SaleHoo, or Doba.

Not only does this mean that starting a business is inexpensive from the beginning, but it also makes it easy to pivot your business model quickly if something isn’t working.

Capital and labor are old forms of leverage. The new leverage is technology because it allows you to reach a nearly unlimited number of people at near-zero cost with zero barriers to entry while you sleep. This is the ultimate form of leverage.

You no longer need capital or a workforce. You no longer need to prove your business idea to a reluctant banker to fund your entrepreneurial dreams. Technology has changed all this. The gates to the path of your financial success are now flung wide open, beckoning you to run through them while this newest generation of opportunities is waiting!

Lessons Learned 

1. While you do need some capital to get started, your initial investment does not have to be very high.

2. Because your initial investment can be limited to a few hundred dollars, you have an opportunity to experiment with different ideas, giving you the opportunity to have an online presence at a very minimal cost.

Khuram Dhanani
Khuram Dhanani
Khuram Dhanani
kd@softstonecapital.com