Starting A Business : Providing Goods vs Providing Services

When I started my IT business in November 2007, I used the bootstrap method to fund my way into providing IT Consulting services to my customers. It was a very effective method; I kept cost down and don't have to worry about production in the normal sense. On April 2008, I partnered with another person to start an aquaculture business with him providing the technology and I providing funding and management. We decided to go with bootstrap method to fund our way because if it worked for my IT business, it will definitely work for a low tech business of rearing fish. We even got a couple of other partners; one a silent partner who provides small bootstrap funding while the other partner joined so we can utilize his sales and marketing skill. It was a huge mistake.

The operation was so small that production could not supply enough fishes to meet the demand. The other problem is that the rate of return was so low that most partners became disgruntled with the business. What happens next is clear; one of the partner quits and became a real estate agent while another partner slowly reduces his involvement and started his own door to door clothing sales business.

So what exactly went wrong?

Well, some business you simply just can't start bootstrap. Some business should be started big to take advantage of the economies of scales. If we had sought funding in the beginning, we would have been able to build bigger ponds, rear enough fish to meet the demand, and get returns that is high enough to keep everyone happy.

The other factor is the fact that these are two completely different type of business. The IT business is created to provide services while the aquaculture business is created to provide goods. Increasing the means of productions for a service based business does not necessarily mean an increase in revenue although it affects goods based business a lot. For example if I have been given a project work $50,000, buying 10 laptops and desktops will neither increase my revenue nor decrease my time spent working on it. However, the difference between having 10 ponds versus 100 ponds of fishes at harvesting is clear.

So there you have it, economies of scale and types of business - providing services vs providing goods. Next post I will talk about another reason business self-implode : Bad Partners.

Starting A Business : Bootstrap Start-Up

I started my IT consulting business 2 years ago. November 1st, 2007 to be exact. At that time I had very little savings so this business is basically a bootstrap start-up enterprise. This is ok because since I am providing a service and don't have to produce products on a daily basis, I don't need that much. This is perfect for me since I can work out of my home, I don't have to rent an office, pay for office utilities, and spend money to travel to and from the office. The living room became my office, the coffee table became my desk, and the sofa and chair became my cupboard and drawer.

Basically, the only business spending that I did was the land line (RM32) and internet connections (RM88). I also invested (RM3,000) into an aquaculture business. So for the first fiscal year my expenditure was (RM4,440). Now during that first year, I did 5 projects that generated (RM3,000) each and 4 projects that generated (RM4,000) each. Totaling all of them up gives me a first fiscal year revenue of (RM31,000).

All this means that at the end of the first fiscal year on 31 October 2008, I made a profit of (RM26,560). It may seem a lot, but break it down to monthly and I am only getting (RM2,213) per month. After paying for groceries, cable tv, petrol/fuel/gas, utilities, etc. all I am left is (RM200) to spend for fun.

For the second year starting in 1 November 2008, I setup a couple of website which cost (RM800). I also invested another (RM3,000) into the aquaculture business I started the year earlier. so my total expenditure was the same at (RM5,240). This year, I did 4 projects that generated (RM3,500) each and 6 projects that generated (RM4,000) each. This gives me a second year fiscal revenue of (RM38,000).

With second year ending 31 October 2009 profit of (RM32,760) which broken down monthly into (RM2,730), things seems to be getting a little bit better. I have accumulated (RM4,000) in savings around this time, but due to unforeseen circumstances I spent it all, and still owe my credit card (RM5,000) on top of it.

Third year... well, we will see. So there you have it. It's not glamorous, it isn't fun, it is a lot of work, but it is a damn dirt cheap of running a business. One thing though, this model of doing business does not apply to all types of business. I made the mistake of trying to apply this method to my aquaculture business. It was a disaster. Check out "Starting A Business : Providing Goods vs Providing Services" for a post mortem of both my start up business.