“You’re not spending enough money.”
That is what the corporate honchos told me in my previous startup, which was an intrapreneurial startup inside a large corporation. That was in the midst of the Dotcom era, when everything online was about getting eyeballs. We had equity partners and a well-funded corporate parent, bringing 7 figures of investment to the table. The emphasis was on growth fast growth.
The feedback was that I was being too conservative with money and needed to grow the business faster.
So I spent more. The money flowed like beer at a frat party. We hired people right and left – even though we didn’t have time to orient them and put their talents to good use. We sponsored events and went to tradeshows – even though our time would have been better spent on making individual sales calls, rather than the distractions of picking out tradeshow booths. We spent oodles of money and, worse, time commissioning swag and marketing materials and advertising creative – even though we had little revenue coming in.
In the end it didn’t help the business. While speed is important, a startup paradoxically also needs time — time to iterate on product development, time to get the team aligned with the business vision, and time to focus on closing sales.
Startups are like babies – you can’t force babies to grow up faster just by throwing money at them.
Fast forward to my current business. I bootstrapped it with my savings and by consulting on the side. That means it has grown slo-o-o-owly. But I wouldn’t have done it any other way. In the beginning I had to earn every dollar personally with the sweat of my brow before I could plow it back into the business. That in turn caused me to focus on whether I REALLY needed to spend money.
Of every expenditure, I would ask myself: “how many hours would I have to work to pay for this expense?” That one question brings clarity.
And the following is what I have learned about spending – and saving money – in the startup years. I looked at some highly successful and well-known entrepreneurs for inspiration and came up with five rules for companies in the first 3 years of their existence:
(1) Be picky. In the words of Evan Williams, a founder of Blogger and Twitter, startups have to be willing to say no – no to partnerships and unnecessary product features and the wrong employees. More wasted money and time comes from going in too many directions than from focusing.
(2) Act like a little company. According to Jason Cohen, founder of Smart Bear Software, who are you kidding by trying to look and sound like a big corporation? As a startup, you’re a little company going after early adopters. Be human. Instead of the snazziest website possible, have a more informal website or blog. Ditch the marketing speak. Not only will you communicate better, but you will save a lot of money on all that fancy design, and you’ll save time wordsmithing all that marketing speak.
(3) Watch every penny. This advice from Michael Arrington of Techcrunch may seem obvious. But in a young company you need to turn “watch every penny” into an art form. First principle: operate in Spartan surroundings. I would add this: become a do-it-yourselfer. Be prepared to spend your weekends and evenings working on tasks – marketing and a little light technology work such as updating your website — that later on you’ll delegate. You will save money. And you’ll learn these tasks from the inside out, and be able to better judge whether you’re getting good value from service providers in the future when you can afford them. Also, use accounting software religiously. When you track your numbers closely, cost containment becomes woven into your business DNA.
(4) Seek out discounts. Not only should you watch every penny – but squeeze those nickels for more. According to Jason Calacanis, go to each of your vendors every 6 to 9 months and ask for discounts. I would add: get used to searching for online discount codes, buying in bulk where it makes sense, and paying the annual rate to save 15% versus a monthly rate. Be on the lookout for rewards from credit cards and charge cards that help you save even more.
(5) “Sales cures all.” Those are the words of Mark Cuban, as one of his startup rules. And I couldn’t agree more. Start selling and bringing money IN the door as fast as possible, rather than worrying about expensive surroundings or tradeshows which are all about money going OUT the door. Track your time to see how many hours in the day you spend working on sales, versus activities that are expense-oriented. Make adjustments. Get your priorities straight.
Now, I realize some of this may sound anti-marketing. Trust me, it’s not. I am a big proponent of paying for good marketing — for a business that can afford it. But first things first. Be ruthlessly stingy on marketing expenditures and every other kind of expenditure in the beginning.
The good fiscal habits you practice in the startup phase tend to stay with you as the business grows. You’re much more likely to remain on a solid financial footing throughout your business’s life cycle.
What do you think? What tips would you add?
This article was previously published at the OPEN Forum under the title: 5 Financial Rules for Startups (Hint: Be More Like Mark Cuban), and is republished here with permission.