As a rule, most start-ups are short on cash and want to spend as little money as possible to give their business enough runway to take off. But there are some times that it doesn’t make sense to bootstrap because it may do more harm than good.
Here are the five places to spend money on your start-up to give you a better chance at success.
1) Get a good bookkeeper or accountant. This piece of advice doesn’t apply if you are a bookkeeper or accountant, but I am not. Having a good bookkeeper is worth every penny. I love – no, I adore - my bookkeeper. Not only is she helpful in getting my budgets together, paying all my bills and cutting checks to all my contractor’s, but because of her past experience, she also has been able to help me with a number of other start-up issues, such as opening a bank account, wiring money overseas, setting up an LLC, registering a DBA, and a number of other business issues that it would have taken me hours to figure out how to do without her. Some people are able to find this experience and expertise elsewhere – with a business partner or advisor, for example – but it’s incredibly valuable to have someone on your team that has done the paperwork before. It will save you hours of work and will keep you from making costly mistakes.
“One of the hassles of ONElist was that I was the one managing the books the first year, as well as answering the 200 support emails every night, as well as doing all this other stuff. I guess I’m torn with how cheap do you want to go with a startup. Having an accountant is kind of a nice frill.” – Mark Fletcher, founder, Bloglines
“One [of the biggest challenges starting a start-up] is, in general, not knowing what’s ‘normal.’ Investors hand us ‘normal’ term sheets, consultants ask for ‘normal’ fees. I’m 21 – I haven’t seen enough of the extremes to know what’s normal.” – Blake Ross, creator, Firefox
“We knew what we knew, which was the product. But there were all these little things that you just have no clue about. It was incredibly overwhelming.” – Mena Trott, cofounder, Six Apart
2) Hire a great lawyer. Do not try to save money on a lawyer. A great lawyer will keep you out of trouble and out of court (which kills a lot of start-ups before they can ever gain traction). A lawyer will also help you when it’s time to raise money or sell your business. Spend money here – it may seem like a waste or too big of an investment, but it’s well worth the cash.
“They’d put in a right of first refusal. Since I was a young entrepreneur at the time, I didn’t understand that this basically meant that you couldn’t go to any other VC…We didn’t have a very good lawyer back then.” – Sabeer Bhatia, cofounder, Hotmail
3) Hire employees with special skills and experience. Stick with contractors vs. full-time employees as long as possible, but when you are hiring, it’s worth a little extra money to get someone who has the special skills and experience that you need. For example, I need a series of reports written in SQL Reporting Services. This is a customized list of reports, I know someone who has written these types of reports in the past, and I am going to hire her to do it for me again, even though it might cost me a little more than a rookie SQL programmer. I am willing to pay her extra because I know that she is good, and she won’t have to spend a lot of time making mistakes and fixing them (because she’s already made her mistakes in the past). Chris hired someone to handle his company’s regulatory issues with the FDA – and he spent a little bit more to get someone who had previous experience working with that particular government agency, which just might help get their products through the FDA pipeline a little more quickly. Plus, the inside knowledge of how the organization works will save them hours of time in preparing documents and submissions.
“The difference in almost any position between someone who does a good job and someone who does a great job might be 20% more in salary, but it’s 100% or 200% more in throughput. If you can have enough people in the company that work twice as efficiently as the person sitting next to them, because they just know what to do, what not to spend time on…It’s just, hey, you give this engineer a task, and it’s just done right in half the time as the next person.” – Stephen Kaufer, cofounder TripAdvisor
4) Splurge on occasional perks that make a difference. Sometimes small splurges can make a huge difference in the company’s culture, and are worth every penny. For me, that means something as small as taking people out to dinner (with their families and significant others) to celebrate whenever we hit a big milestone, to thank them and to mark the occasion. Chris’ company, at a recent conference in Jamaica, instead of getting each employee an individual hotel room, rented a villa (for just a bit more money) that came with a private cook, housekeeper and butler. The experience that we had on that trip far exceeded what it would have been if we didn’t have authentic, home-cooked Jamaican breakfast every morning. The extra cost was worth every penny.
“We were very frugal and we didn’t spend money on frills, but after the IPO there was a really bad time for Marimba when it was very difficult to hire people, and all the early people that had been there 3 to 4 years were starting to leave. Morale was very low, and so I went to the CFO and said, ‘Look, I want to buy an espresso machine.’ And he said, ‘No, we can’t do that, it’s too expensive.’ A few weeks later when another senior engineer quit, I said, ‘Screw it, let’s buy an espresso machine.’ So Jonathan and I went online and bought this super-duper Italian, fully automatic, $15,000 espresso machine on his credit card and submitted the expense form. The CFO almost had a baby…They came and installed the espresso machine and it was the best money we ever spent. Every morning, people would meet and crowd around it…people loved it, they couldn’t stop talking about it. A month later, the CFO came and said ‘I’m sorry, we should have done this years ago.’ And it tells you something about where you spend your money and what you spend your money on. It’s not just business-related expenses. You also have to create an environment that you like so that people are happy and feel they are valued.” – Arthur van Hoff, cofounder, Marimba
5) Spend when it will accelerate the business. The first four months of my start-up, all my Web sites were running on a hosted server that cost about $40/month. Low-cost, low-bandwidth – and I didn’t need anything more than that. Shortly, I will be rolling out a Web application that will need a more robust server environment, so I splurged on getting my new servers set up well ahead of time. I started paying for the servers in January (I likely won’t be using them full-power until March), but having the extra time to set up and test and move all my existing sites will allow my business to hit the ground running when the application is finally delivered.
“I wouldn’t recommend [skimping on hardware sometimes]. We often had to replace stuff we bought because we had been so worried about costs.” - Mena Trott, cofounder, Six Apart
“As you’re growing…what I tried to foster here is an attitude of risk-taking, where all I want to know really is what’s my downside scenario in terms of time and opportunity cost?…If the amount of time spent making a mistake is small, don’t be afraid to make a lot of mistakes without a lot of time analyzing whether you should or shouldn’t do it. On the Web, it’s particularly easy to try something and get feedback. If it doesn’t work, drop it.” – Stephen Kaufer, cofounder, TripAdvisor
Eventually, even after a combination of saving and spending, start-ups often get low on money and need to look for additional funding. Next week, I’ll talk a bit about where start-ups can get cash, and the pros and cons of each option.
All of the quotes in this article are from the wonderful book Founders at Work: Stories of Startup’s Early Days, by Jessica Livingston.