Every Dollar Spent At A Startup Should Yield A Return

ROIRichard White, author of The Entrepreneur’s Manual, surveyed a number of venture capitalists, asking them to identify the characteristics of successful, serial entrepreneurs.

One of the attributes identified by all of the venture capitalists questioned was, “Frugal use of capital.” In fact, several of the venture capitalists pointed out that successful entrepreneurs often have to be encouraged to spend more aggressively. In my experience at Rincon Venture Partners, I have worked with a number of successful, serial entrepreneurs who instill an urgent sense of frugality into their adVenture’s corporate culture.

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Mayday Mayday

The most prevalent cause of private aviation accidents is running out of fuel. In most instances, the pilot miscalculates the amount of gas required to reach his destination. A number of issues can impact aviation fuel usage, including; headwind, speed, average altitude flown, cargo weight, number of passengers, etc. A mistaken assumption can result in a crash landing, and the pilot’s grieving family on the 11:00 news.

Cash is the fuel in your startup’s gas tank. You will not reach your destination without enough of it. Your adVenture’s journey is akin to a trip across the desert with no gas stations in route. When you embark on your journey, it is prudent to plan on crossing the desert on a single tank of gas. You cannot afford to speed, gun the engine, take detours, or spend your precious cash on a killer stereo to entertain you during your trek. If there happens to be a gas station along the way where you can fill up for a reasonable price, great. However, do not count on it. Capital efficient, web-based businesses should have a credible plan to self-sustainability. Future funding should be discretionary to propel prospective growth, not a matter of survival.

Living Below Your Means

Frugality was missing-in-action at many bubble-era Dot Bomb companies. In many cases, these companies were led by untested and unproven entrepreneurs who did not understand the importance of frugality.

In 2000, at Expertcity (creator of GoToMyPC and GoToMeeting, acquired by Citrix), we raised $30 million at an $80 million pre-money valuation – for a startup with absolutely zero revenue. After we closed this funding round, I vividly recall a conversation with a Senior Engineer who was aghast that I was not willing to commit millions of dollars to a billboard campaign in Times Square. His argument was, “What’s the risk? If it doesn’t work, we can just raise some more money.” This is not an apocryphal story. These words were actually uttered by an otherwise intelligent human being. This absurd statement caused me to realize that I had done a poor job of instilling a sense of frugality into our organization.

Along with Selling (see Be Like Sam) and Networking (see Making Stone Soup and Personal Pitch), negotiating is a vital startup skill. ALL of your employees must sell, network and spend the company’s money as if it were their own.

Most rational adults are fairly judicious with their own money (obviously to varying degrees), but many of these same adults often spend their company’s money as if it is an infinite resource. Fortunately, most people with this dysfunctional spending gene work at Big Dumb Companies and government agencies.

One way to combat reckless spending is to instill a sense of pride in your employees to never pay full price. For instance, whenever someone at your venture saves your company money, send a company-wide email acknowledging their accomplishment. Although some of these emails will highlight relatively small savings, these communications will serve as a reminder that every member of the team should remain alert to identify money saving opportunities. It will also create a forum to acknowledge and reward employees who put into practice this important aspect of your startup’s culture.

By publicly acknowledging employees’ efforts to spend the company’s money wisely at the aforementioned startup, we went from the spendthrift mindset uttered by the Senior Engineer to a culture in which employees stopped me in the hall to tell me how they had saved the company $50. See How To Create A Celebratory Culture for other tips regarding how your team can revel in its small victories.

You should never be embarrassed to ask for a discount. Rather, you should be ashamed to pay full price. Encourage all of your employees to ask, “Is that your best price?” when they rent a car, check into a hotel, buy paper for the copier, etc. This simple question will result in real savings and will help to ensure that your employees spend the company’s money as if it were their own.

Every dollar your team spends in a non-productive fashion has a direct impact on each employee, irrespective of the stage of your adVenture.  In the early stages it equates to an additional dollar that must be raised in a future funding round, thereby increasing the relative dilutive impact of such a round. In a company’s latter stages, a wasted dollar directly impacts the company’s exit valuation, which is influenced by the company’s net income.

Professional Negotiator

Consider assigning someone in your Finance department the responsibility of negotiating all of your company’s large purchases. At Expertcity, I shared the cost savings with one of our Financial Analysts. For every dollar he saved the company, he earned twenty cents, which was paid in the form of a quarterly bonus. Once he proved his negotiating skills, people from all over the company brought him significant acquisitions for him to negotiate.

Enter Liquidator Larry

The manner in which you and your employees spend your precious cash should have no correlation to how much money you have in the bank.

Despite the fact that we had over $30 million in cash in the bank at Expertcity, I dubbed one of our salespeople “Liquidator Larry”, due to his talent for purchasing used office equipment and furniture from failing companies. Our adVenture was located in an incubator, and as each Dot Bomb went up in flames, we purchased their office equipment (and sometimes even their office supplies) in conjunction with taking over their office space. In fact, in some cases, we were able to acquire a sizable amount of office equipment and furniture for free, in exchange for relieving the failed companies of their lease obligation. It was more than a fair exchange, as we relieved several people of multi-year lease obligations that would have been disastrous to their personal finances.

Another Reason To Be Like Bill

For many years after Microsoft became highly successful, its executives (yes, including Mr. Gates) flew coach. Clearly they could have afforded more luxurious accommodations. However, Gates and company realized that there were far more productive uses of Microsoft’s cash than to expend it to ensure the temporal comfort of a handful of traveling Executives.

Bill understood that startups must spend their money on assets that will deliver a Return on Investment (“ROI”). Avoid pricey office space and expensive office furniture. In a few select instances, such showy spending might be warranted, especially in the public aspects of your business (e.g., the lobby, customer training rooms, etc.). However, when outfitting your offices, keep your ego in check – only purchase expensive accoutrements if they will directly lead to incremental sales.

The one exception to purchasing economical office furniture is office chairs. Spend adequate money to purchase chairs that will minimize ergonomic injuries. Allow your employees to select a reasonably priced chair from an approved list. Empowering your employees with this choice demonstrates that you are concerned about their comfort. In addition, they will be less likely to complain about a chair that they selected.

When hiring early employees, shun candidates who value non-monetizable creature comforts. Make your employees "comfortable" by focusing the company’s expenditures on acquiring productive assets which will maximize the value of their equity and ensure that they will consistently receive a paycheck. A mahogany desk or a blowout Holiday Party will not motivate employees who are on the brink of losing their jobs. In fact, non-ROI spending will ultimately fuel resentment and disillusionment and cause employees to ask the very reasonable question, “What is valued more at this startup? Executive perks, lavish parties, fancy furniture, or the company’s long-term survival?”

Darwinian Reality

Companies do not run out of money. They run out of investors willing to give them money. You can avoid running out of friendly investors by ensuring that every dollar spent at your startup is associated with a clear and measurable return.

Image courtesy of: http://www.channelship.ie

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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