I get this question almost on a daily basis when people are wondering wether they should start a smaller business with the limited funds they have or save up and launch a 'larger' business. I wanted to answer this question here so that you can get my two cents.
The answer is pretty simple.
I think that you should do what feels right. Things can be very different for all of us and especially for different types of businesses. For example, for a barber shop chain you can’t really start too small unless you start cutting hair from the garage in your house. Otherwise it is incredibly difficult to have a brick and mortar store without investing some capital up front (usually in the thousands for the location, equipment, etc).
With a tech startup though, starting small is totally possible because the cost to entry is little to none.
In both cases it’s important to validate your idea first.
Is there a market for it?
Will people pay $5, $10 or $99 for it?
I suggest you check out ‘The Lean Startup’ by Eric Ries (I’ll have a summary of this up soon by the way). The basic idea is that before you start pursuing an entire idea, you should always make sure people will pay you for it. The whole mentality of 'build it and they will come' is not a good strategy and most of the time results in failure.
Your decision also depends on your gut feeling. If you feel incredibly passionate and motivated about an idea that you can start small then go for it!
If, however, you feel that you really want to save up and start something bigger then (although it’s a bit more risk averse) it’s ok to go that route.
Let’s say that you really want a solid answer out of me. This is my advice.
Start small so that you can test your ideas and fail fast if needed. Most successful companies we know of today were once only small side projects (Facebook, Apple, Google, etc) but the passion and traction that led to what they are today was caused by the services and products actually being really good.