Want to launch a startup? Look for low marginal cost.

by | Sep 2022 | Start a Company

Sorry, but no. I won’t invest in your consulting / teaching / designing / building / manufacturing / retail / tourism / transport / services business. Nor will anyone else…

…Unless they love you.

I spoke with a lovely chap yesterday in the North of England. He’s about to make the shift from corporate employee to business owner and entrepreneur. He has a website, he has a plan, and he has a year’s worth of money in the bank. His business: consulting.

My two pieces of advice to him:

  1. Make sure you can sell BEFORE you quit your job. Nearly all businesses live or die based on their ability to sell. As Y Combinator’s tag line says: "Make something people want".
  2. Forget raising money. For a consulting business, you will waste a tonne of time, and get nowhere. Consultancies should make money from day one. They should provide instant value, which needs to be paid for. If you do need money, get a loan. For maximum speed, borrow from friends and family (but make sure you create a proper legal agreement!), and pay it back as soon as possible.

Low marginal cost

If YOU are thinking about starting a business, and you believe you’ll need external capital, understand that most startup investors want to back business models with “low marginal cost”. That essentially means companies whose costs don’t increase much as they ramp up sales/production. Usually, these companies are either media or software.

While all businesses can grow and make money, low marginal cost businesses can scale incredibly quickly. If you write a piece of software, or a song, it costs the same (more or less) to sell it to one person or to one million people.

Try doing that with holidays or schools.

That’s why investors focus on low marginal costs – because they can deliver large exits in short periods of time.

If you want to launch a startup, focus on software or media (ideally in a niche you know better than anyone else).

If you want to start investing in startups, focus on (media and software) companies with low marginal costs. Also spread your bets – remember most investors make 90% of their returns from a single company, so it pays to be in as many (low marginal cost) deals as possible.

Image credit

– Rocket image by Andy Hermawan.

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