Reducing initial investment image

Reducing Initial Investment

Reducing initial investment is desirable from a cash management standpoint, but also from a risk standpoint.  Tactics to reduce initial investment in a project are listed below.

Staged investment

Make a partial investment, and wait for more information before making follow-up investment.

Example: Buy land.  Develop if it is desirable to do so.

Example: R&D project.  Invest in commercialization if technology has matured after project.

Option: Call

Premium: Initial investment.  This can be a series of call options where each successive investment is the premium on the next option.

Exercise Points:  Promising results of initial investment project, more information arrives to facilitate exercise decision.

Test marketing

Test the market with a scaled back product to reduce up front development and tooling costs.

Option: Call

Premium: Investment cost of initial product.

Exercise Point:  Marketing results are encouraging.

Start with simple manufacturing

Use manufacturing methods that don’t require heavy tooling investment.  The trade-off is efficiency.  Can invest in tooling later if it is desirable to do so.

Option: Call

Premium: Cost of less efficient manufacturing

Exercise Points: Cash flow improves, unit volume too high to meet demand.

Find partners

When you lack expertise or resources, finding partners can be a useful strategy.  Below are some sources of partners.

A joint venture partner to share investment and/or provide expertise.  Returns are shared, of course.

An initial customer could be a partner.  If a customer has a problem that needs a solution, they may be willing to assist you with development costs and provide a testing environment to continue development.  Assuming that the customer does not require complete exclusivity, the competencies and product knowledge can be transferred to a broader product or service.

One or more suppliers may share in investment as well.  Instead of manufacturing in-house, a supplier may already have the skills and tooling necessary to manufacture components or the entire product.  The potential trade-off is that you could pay more to outsource, hurting your initial margins.


Lease versus buying capital equipment.  Lease versus buy real estate.

Debt financing

Use debt to purchase capital equipment, materials, etc.

Outsource products and components

Outsourcing can be an effective way to reduce investment, especially if you don’t have the capability or capacity to produce in-house.  This assumes there is little to no tooling charges from the supplier.

The potential downside to this strategy is that unit costs may be higher than in-house production.  On the other hand, it could also be lower.

Buy small quantities

Buy smaller quantities.  Will usually result in higher unit cost because of the smaller quantity.

Option: Call

Premium: Extra cost per unit due to low buy quantity.

Exercise Point:  Extra capital becomes available, market demand becomes more certain.