After you’ve made the decision to start your own company, and have gotten past some of the early emotional hurdles, the next issue that comes up is usually money. Specifically, how you can you use the money that you have – which is usually limited - and make it last as long as possible. In fact, when Jessica Livingston asked the founders that she interviewed for the book, Founders at Work, about their advice for would-be entrepreneurs, it was often “spend as little as possible.” (All the quotes that are used here are from that book.)
Here are five great ways to save money with your start-up:
1) Take as little salary as possible. When I quit my job to start Pure Incubation, I took a huge pay cut. I didn’t go salary-free, but Chris and I came to an agreement about the lowest salary I could take so that we could still afford to live the lifestyle that we wanted. I still take trips, I still eat out, but we have cut back in a lot of areas. Some people are even able (and willing) to not take a salary at all. Obviously, if you can go this route it’s ideal. Overhead costs from salaries often are a huge burden to businesses, and the lower the salary you take, the longer your money will last.
Some people aren’t able to take such a huge pay cut, so they keep their day jobs. This works for some people, who either don’t work long hours, have a job that isn’t very demanding, or don’t need to put in a ton of hours to get their business off the ground, either because they’re patient, or their business/idea isn’t time-sensitive. This is a great way to keep your salary down if you can do it - essentially, you’re being paid by the company for which you’re working 9-5, which is helping to support your start-up.
“We were…both working, so we decided to spend all of the time on the weekends and evenings building this product. Then it came to a point that one of us had to quit our job to focus full-time on it, so I told Jack, ‘I’m single and don’t have a family. Why don’t you quit and start working on this and I’ll give you half of my salary?’ So at least he could support his family. I didn’t need that much money.” – Sabeer Bhatia, cofounder, Hotmail
“Initially we put in a little bit of money, I think $25,000 each. If you don’t take a salary, that can last you a long time.” – Arthur van Hoff, cofounder, Marimba
2) Don’t get traditional office space. I live in a two-bedroom apartment. It’s a great apartment, second floor, ocean view – and it’s plenty of space for me and Chris. When I first started thinking about starting a company, I was planning on setting up shop in our second bedroom, which is where Chris worked when he was starting his company. But as I looked at the space, I realized that I wouldn’t be happy in that room. So I got a new desk (from IKEA, definitely don’t spend a lot of money on office furniture!) and it matched the rest of the house well enough that I could set it up in our sunroom – the view from my office is of the ocean and I love “going to work” every day.
If you have a space in your house that you use for your office, do it. After overhead, the next biggest cost of business is often office space – and renting office space is like throwing money out the window. If you work with other people, see if they can work from home, too. Use IM, email and phone calls to communicate, and have meetings at your local coffee shop or at your dining room table.
If you must be in the same location, find as inexpensive a space as possible. When Chris got his first office, it was a tiny little space that cost about $400 per month in the Cummings Center, a converted shoe factory in Beverly, MA. But the great thing about that space is that there are hundreds of other office spaces in the building, so when he outgrew the space (which happened quickly), he was able to transfer the lease to a bigger office. The other great thing about the Cummings Center is that it’s close to the commuter rail, so when he needs to hire more people, he can look in Boston, as well as the outlying communities for talent.
“[We worked] in Robert’s apartment. His housemate was away that summer, and I moved into his room. Robert used to get up early, whereas I stayed up till four and got up at noon. So we would kind of work a 24-hour schedule.” - Paul Graham, cofounder, Viaweb
“We had a friend who was subletting a space, and he had a contract job that kept him out of the office all the time, so we sublet his subletted space. This was in 2002…there were failed dot-coms all over the place, so office space was cheap.” – Caterina Fake, cofounder, Flickr
3) Hire contractors vs. full-time employees. There are many reasons to start off hiring contractors vs. full-time employees. For one thing, contractors usually expect to work from home (allowing you to forgo the office space), and they often have their own equipment. Employers aren’t expected to pay for healthcare or 401k costs for contractors, and if you hire a contractor and they aren’t doing a good job, you can fire them without paying a severance or feeling completely terrible since contract work, by its nature, isn’t permanent. Chris’ first full-time hire didn’t end up working out, so he had to let her go, and it was one of the most traumatic things that he had to do in the early days of his business. He didn’t sleep for a week, and they ended up paying her a month’s salary in severance (mostly out of guilt, I think). Since then, he’s started hiring contractors and moving them to full-time when he’s ready.
I’m currently working with about 20 contractors. I’m the only full-time employee, but I am still able to get everything done, and I don’t have the worry about overhead depleting my bank account. And if there is a month when money is tight, I can cut back on contractors. Plus, often when you’re starting out, you don’t need 40 hours a week of a specific skill set – or if you do, it’s a temporary thing that will end after a project is complete. It is only when your business is at a point when it needs a dedicated 40 hours per week committed to a specific task or set of tasks that it’s time to hire a full-time employee.
“One of the things that I did…with Bloglines was rely upon an outsourcing site, in this case eLance, for a lot of things…So, if I wanted to put together a presentation and I needed a couple of graphics, I put up a proposal on eLance and ended up working with some lady in Australia who turned things around in 6 hours, for $50. So sites like that are so amazingly powerful, which is just one more reason why it’s really easy to do very small companies, because you don’t need a graphic designer necessarily.” – Mark Fletcher, founder, Bloglines
4) Cut back on everything you possibly can. The other places where you can really save money will be different for every business. For me, I have kept expenses down by taking a chance on some less-experienced writers and designers who are working on building some of my sites and writing content. When I need a stellar design that only someone with vast experience can pull together, I’ll hire that person – but until then, I’m comfortable with getting my business cards designed professionally for $150 and printing them out at Staples (on high-quality card stock, of course). Other people find other areas to save.
“Do everything as cheaply as you possibly can.” – Paul Graham, cofounder, Viaweb
“Reduce. Do as little as possible to get what you have to get done. Do less of it; get it done.” – Joshua Schachter, founder, del.icio.us
“Even if you raise money, spend it as if it’s your own and you have none. Your organization has got to remain smart and lean. Be cheap. There’s no shame in being cheap. I still fly coach.” – James Hong, cofounder, HOT or NOT
“We basically sat in the garage coding for around 18 months. In retrospect, it was really fun…It got cold in the garage and we didn’t have a heater, so we would use the dryer for heat. We’d tape the little button down that made it run with the door open.” – Joe Kraus, cofounder, Excite
5) Take on some contract work. This isn’t exactly a money-saving strategy, but it is a way to build a little extra cash, which amounts to the same thing. I have been offered a number of contract projects since starting Pure Incubation, most of which I’ve turned down. But on a selective basis, I have taken on a few projects. The ones that I’ve chosen have either been in my power alley of experience (meaning that I didn’t have to work too hard to get them done and could charge a premium for my expertise), or have allowed me to be paid to extend my skill set in an area that I didn’t previously have experience.
For example, I recently took on a marketing project that involved sending out a direct mail piece. I own an Internet-based company, I do everything online, typically. But I realize that I may need to do some direct mail at some point in the future. By taking on this project, I learned about the issues with the U.S. Postal Service, international mailing and made contact with local printers and marketing copywriters. The best part – I was paid to learn.
“The consulting company was a means to an end. It was to get cash flow, so that you could build a real software company.” – Joel Spolsky, cofounder, Fog Creek Software
“We were chosen under a Request for Proposal bid to build a student accounting system for a vocational school in the state of Minnesota, which helped us focus on what we were going to do…It was really a one-off. It also told us how we could underestimate a project, how we would manage a project, how we would manage engineers, how we would manage or own time. And we got paid for learning on the job.” – Ann Winblad, cofounder, Open Systems
Although it’s great to save as much as possible, there are times when you still need to spend. I’ll talk about those times tomorrow.
Front porch office photo by Daniel Morrison
Do it Yourself photo by colros