Businesses often start with an initial large amount of capital, but many businesses start small. Some businesses expand continuously over a period of years until they are classified as large businesses. Other large organizations are the result of mergers. Although some small businesses expand, many remain small.
An individual who contemplates starting a business must determine for himself the essentials necessary for a successful business, the means of securing initial capital, and the location for the venture. In many cases the start of a business is not a matter of clear, studied plans or logical development but an accident. Many times a particular location is chosen on no better basis than the fact that the people who started the business were familiar with a particular location. However, it is very seldom an accident if the founders are able to secure capital from outside sources, because the world is not overpopulated with people willing to invest money in an untried venture of dubious promise.
Many assume that the most important requirement for a business is capital. While capital (or in simpler terms, money) is a very important consideration, it is nevertheless of secondary importance. No amount of money will start a business or keep it going if this particular business does not satisfy some demand. Beyond the ability to secure sufficient capital, the most fundamental requisite for starting a business is an idea. There must be some reason why the founders of the business-often described as the entrepreneurs – think the venture could succeed. The idea may be a new or better product, a new source of materials, etc.
All the products with which we are familiar today were at one time new products. The basis for a new venture need not be a new product. A better product may also justify the start of a new business. It is often difficult to distinguish between novelty and improvement or a combination of both in a product which is new, at least, to the market. This is unimportant, for if the product or service meets other requirements set forth in the following paragraphs and if there is a potential market, there is a basis for the business.
If a new source of materials that supplies a manufacturer at a lower cost becomes available, a business can be developed about this circumstance. If the new source of raw materials is so much cheaper than existing supplies that new markets can be opened, this will favor a new venture. If the new sources supply materials that make an improved product possible, this will contribute to new or better products. Sometimes a new source of materials is essential because previous sources of supply have been exhausted, as in the case of iron ore reserves.
Inventions are sometimes awaiting development because the inventor does not appreciate the possibilities, lacks capital, or lacks experience in the commercial development of his idea. The invention mayor may not be properly protected by patents. An individual or a group may see in a particular invention the promise of a successful business. They may supply what the inventor lacks, i.e., development of the possibilities, adequate financing, and the experience in creating production and marketing means. They will also take steps to protect the invention adequately by employing competent engineers and patent attorneys.
Study of the operations of existing businesses often leads to the conviction on the part of an entrepreneur that the business could be so operated as to expand the market, reduce operating costs, and thus show a greater annual profit. The success of many chain-store operations, supermarkets, discount houses, and appliance manufacturers stems from the successful demonstration that these businesses can be operated more efficiently than many of those previously engaged in these lines of business. Often the entry of new businesses makes the older businesses study their operations and determine on long-overdue improvements.
With a constantly increasing standard of living, products can now be marketed which a few years back would have been available only to the wealthy. The tremendous electrical appliance business depends upon the availability of electricity with standard characteristics. Similarly, the trailer industry and related accessory industries developed with increased use of automobile travel.
The individual or collective experience of a group sometimes furnishes the principal motivation for a business venture. Many former government employees who have served in various tax units or other specialized government functions enter into businesses such as importing and exporting, tax consulting, or other specialized technical services. Similarly, a former employee of a hat manufacturer may open his own shop to repair, clean, and block hats.
No one would ever start a business if he were not optimistic about the success of the venture. Ventures that have no other justification but optimism seldom succeed; instead, they contribute to the large number of business failures. Other people are making money in this business, why can’t we? As the principal reason for a venture makes a poor substitute for a well-developed idea and a proper investigation of possible markets for the product or service.