The startup guide to spending money

The startup guide to spending money

If you don’t manage your finances well, your startup could end up belly-up

Paul Graham of Y-combinator puts it aptly, “When and if you get an infusion of real money from in­vestors, what should you do with it? Not spend it, that’s what.” And if you do need to spend it, being frugal is the way to go. Being parsimonious is not a negative trait in the start­up world; it’s something that will do wonders in helping you keep your startup alive.

Spend money on understanding customers

The business world is inundated with vanity metrics. Details about press coverage, brand power and in­vestments raised look good from the outside, but these things do little for the eventual success of the business. The sad reality is that many busi­nesses spend a lot of money running after what looks good from the out­side, eventually running out of mon­ey for more important matters. It is a fact that in business, nothing matters more than getting your cus­tomers. Therefore, it makes sense to spend money on ideas that will help a business understand its audience’s needs to get more customers. When Google entered the search-engine market in 1998, the market was dominated by big players like Yahoo, Lycos, Excite and Infoseek, who’d all spent millions on building their brands. The founders of Google knew that the brand name would not mean much if they provided better quality and more superior services. Google spent most of its resources on getting to know everything it could about its customers and on improv­ing the product. Slowly, Google grew in size and managed to increase its customers even though it had not advertised as much as its competitors. Google’s competitors would have done better to spend those millions on improving their software than on advertising. Future startups should learn from mistakes like these be­cause there is nothing more valuable, in the early stages of a startup, than the users. If you listen to them, they’ll tell you exactly how to make a win­ning product.

Live like a student

The overarching philosophy for most startups should be to live like a grad student instead of a law firm. Aim for cool and cheap, not expensive and impressive. This is difficult to remem­ber when a startup gets funded by an investor. It’s important to realise that the millions in your bank account is the money that your investors have given you in the hope that you’ll be able to generate revenue, and become rich. You’re technically still poor. Consequently, the best place for an entre­preneur to start is, for example, to rent an apartment to house your office, in­stead of a corporate space. This not only saves a lot of money on rent, but also creates a homely environment where employees can develop ideas. Graham says, “The key to productiv­ity is for people to come back to work after dinner. Those hours after the phone stops ringing are by far the best for getting work done. Great things happen when a group of employees go out to dinner together, talk over ideas, and then come back to their offices to implement them.” By instilling a culture of frugality, you are teaching your people to make maximum use of what they already have, which is a very crucial trait for a startup.

Don’t hire anyone

Hiring people is one of the worst things a company can do from a fi­nance standpoint. It is a recurring ex­pense, and tends to consume most of the company’s resources. Worst of all, the more people you have, the more they slow you down: in a large office, what could have been an employee just steal­ing a peek into someone’s office to dis­cuss an idea, could turn into scheduled meetings. Therefore, the most effective way to save money is to not hire people. But this is a rule that is very hard to follow. People like the idea of having a lot of people working for them, and the most common question businesses are asked goes something like this: “How many employees do you have?” This placing the worth of a company on the number of employees doesn’t help any­one. Don’t hire people to fill the gaps in some a priori org chart. The only rea­son to hire someone is if they can do something you’d like to do, but can’t. If two companies have the same revenue, it’s the company with fewer employees that’s more impressive.

Advertising can be your death

It’s very tempting to advertise to the world when you are a startup, and this is completely understandable. Compa­nies like Flipkart and Amazon, in Asia, spend millions on advertising. It is hard to resist the lure of mass advertising—the chance of reaching millions of con­sumers at the same time, connecting with them, and building a brand recall are all difficult to resist. But doing so could spell disaster if implemented too soon. Many startups pivot their busi­ness models in the initial months or after years of having been in operation. Spending part of the funding on adver­tising during the initial journey of a startup when the product or the busi­ness model has not been established yet, might not only prove to be a mas­sive waste, but also counterproductive. If you must get your message across to the masses, build up your social media presence during this time, connect with the audience, develop a two-way dialogue and gain valuable feedback as well. The best advertisement is through word of mouth, so focus on building up to stardom, rather than on being an overnight sensation.

The startup guide to spending money is to spend very little. Most businesses will have access to investment. Howev­er, the main difference between the suc­cessful ones and ones that fail is their ability to manage money by being fru­gal. Don’t let money become the source of your startup failure.