6 Common Areas Where a Tech Company Startup Budget is Wasted - by Phil Morettini
One of the most important skills that an early stage technology management team really needs to have is the ability to objectively manage the startup budget. This is a very difficult task as senior managers are dealing with so many unknowns it is often hard to know where to spend – and where not to. Although it may be counter-intuitive, the where not to is usually the most important of the two. That’s because above everything else it is critical in the early days to extend the company’s runway until traction is obtained in the market. The number of zeros in the budget varies if the company is bootstrapped vs. venture funded, but the basic principle remains the same. Don’t run out of startup capital before your product is bringing in enough revenue for the company to become a going concern. Below we’ll take a look at some specifics of that principal.
Burning the Startup Budget Prematurely Can Kill Your Company
This is a delicate issue in any startup. Generally there is a yearning for more people; rarely do early stage CEOs feel like they have too many staff members. So there is a tendency to want to hire when a particularly good individual becomes available, or when there appears to be a bit more money in the budget at a point in time than was expected. But care must be taken to make sure that at this very early stage the hiring candidate is absolutely NEEDED. The only exception is if you fortuitously run across an individual where you have a high level of confidence that that person will ALMOST IMMEDIATELY increase revenues or reduce expenses, above and beyond their cost in salary and benefits. I consider this to be an unusual circumstance and not one that you should talk yourself into believing very often.
Staff expenses can’t (or at least SHOULDN’T) be treated the same as a new marketing program or desk chair that can be jettisoned easily if not needed. So at this stage my usual advice to “hire slowly, fire slowly” becomes even more critical. Staff is an ongoing expense that drains that precious, finite capital base of a startup continuously every month. It shouldn’t be viewed in the same light as short-term or one-time expenses are. Even if you unadvisedly treat your people like a physical asset or promotional program and feel you can reduce them easily, this can have an even greater negative effect on your short-term and long-term prospects by hurting morale and damaging your company culture. Bottom line is that even though every startup executive can complain about lack of people resources, for budgetary reasons it’s critical to not give into these natural feeling and hire someone you’d “like to have” unless the situation CLEARLY, objectively warrants it.
Excess Product Features
Just as most startup CEOs likely don’t think they have too many people, they also probably don’t think that they can build “too robust” an initial product either. Obviously everyone wants to get to market with the best possible chance of gaining traction. If the product is better, that’s great, right? The biggest problem with this viewpoint is that “nothing comes for free”. There is inevitably a trade-off between features and time-to-market, as well as a trade-off between features and the reduction in startup budget available for other (often critical) activities. For example, I often see in startup software companies who are led by management teams from a technical background a tendency to keep developing well past the stage of a minimum viable product (MVP). Again, on one level this seems rational. But there are three major problems with this approach:
- More extensive development leads to less startup budget left over for sales & marketing (in extreme cases I’ve seen “less” turn into “none”)
- It is often difficult to know in a startup exactly WHICH features are important to the market; so the best feedback usually comes after the initial product hits the market, making an extensive initial product feature-set often inefficient with respect to market needs.
- Extensive feature development usually also delays the market introduction of the initial product, which not only allows the introduction of new competitive products to move ahead of your offering as well further deplete the startup budget by extending the number of months with a deep burn rate
The takeaway here is yes, you need to introduce a product that you believe will have a differential advantage in the marketplace. But don’t pile on every last feature that you can think of — save those for consideration in version 2.
Legal expenses in the startup budget
This category is again a totally reasonable expense for a going-concern company. Everyone wants their policies, procedures and other documentation to be on solid legal footing. In addition, for software and hardware companies that are basing their business plans on significant innovation it may seem CRITICAL to file patent applications to protect that innovation. The issue is that before you have created a viable, on-going business every dollar that you spend on legal is a dollar that you can’t spend on sales, marketing and product development to create an operating business. So in my opinion, it usually makes sense to accept a bit more risk than maybe is comfortable on the legal front in these early days. The exception to this advice is a technology business that is based solely on licensing IP; since licensing is really to become your “operating business” protecting that IP at an early stage is critical. But for everyone else, you might be able to delay filing that patent app while you are in product development, protecting the IP initially as a trade secret prior to getting to market. Then maybe file a provisional patent once you have some early revenue flowing and a full filing before you go out to raise an “A” round of funding.
The above advice is just one example of how to minimize IP protection in the startup phase; every situation is different and your mileage may vary. Other ways to save money on legal is to take advantage of the many free boilerplate examples of important (but common) documents such as partnership agreements, channel contracts and sales rep agreements that can be easily obtained via industry colleagues or on the Internet. Your attorney will caution you about this as he would like to charge you $300-600/hr. to create a custom contract for you. In reality, he’s usually reaching into his file and giving you a boilerplate agreement that his firm has used for 50 other clients and adding value with only a minimum of customization. If you’re a B2B SaaS software company, chances are your channel contract can look pretty similar to another B2B SaaS company in a non-competitive market segment. You can also consider saving money early on using a local, sole practitioner attorney who charges $150-200/hr rather than that name-brand tech law firm that may charge several times that. Finally, if you just must use that name-brand firm, if they are excited enough about your prospects they are sometimes willing to defer their charges until you reach a funding event. If you aren’t successful in raising an institutional round you may not owe them at all, and if you do raise that round you’ve deferred this large expense until you can actually afford it.
I’m not at all against travel in startups; strategic use of travel can be an important component to a startup tech company’s success. But over the years I’ve seen a number of startup founders take this expense to excess. It’s 2017; a lot of business can be transacted via email, phone and video services such as Skype. I fully support hopping on a plane if you have good, objective reasons to believe it will make a difference in closing a big customer early or forming a critical strategic partnership. I’m much less excited about the CEO who hops on a plane and travels cross country on a hunch or a whim. A startup budget gets crushed quickly with this type of behavior and it’s unfortunately more common at early stage companies than one would expect. So I advise when at all possible to take discussions are far as you can go with less expensive means of communications before committing to travel. Not only is it more cost-effective, it’s also more time-efficient in many cases.
Sales or Marketing – too soon or too much
This is startup budget expense item that reminds me of the old revolutionary war saying: “Don’t fire until you see the whites of their eyes”. Sales and marketing (at least one and usually both) are functions that are CRITICAL to every tech startup company. As I’ve discussed elsewhere in this article, it’s crucial that other less-critical expenses don’t deplete the funds needed to adequately sell and market in the early days. The issue that sometimes goes unnoticed is that if you begin these activities prematurely, they can become wasteful expenses themselves. Until the product is really ready to sell, resist the temptation to spend material amounts of money on marketing. A few inexpensive test campaigns are ok, but definitely don’t overdo it. Also make sure that you don’t commit big money to major marketing campaigns tied to a prospective product introduction date that can’t be cancelled or delayed. Product introductions slip – ALL THE TIME. On the sales side, it usually is VERY premature to hire sales reps if the senior staff hasn’t been able to close some initial deals. Hiring reps – especially in any quantity – before there is a repeatable sales process to train them on, is one of the most common mistakes I see in the early days of technology companies.
Premature International or Distribution Channel Development
I’m a big fan of getting to international markets as early as possible and have written about it extensively. I’m also a big proponent of leveraging your expensive IP by selling via every sales channel available to you. The problem is that some folks want to get there so badly that they expend scarce startup budget resources before they are ready. International sales development is great; except when you do it before you’ve built a reference customer list in your home market (or even worse, before the product is actually ready).
Channel development usually needs to wait even longer. Channels are notoriously demand-driven. Until you’ve really debugged your sales process so that it’s easy to train a channel on how to sell the product, have a good customer reference list and have created some pent-up demand for your product, any money spent on this area will likely be wasted. It’s somewhat counter-intuitive; channel resellers will often be happy to discuss your new product and sometimes even sign up as an authorized partner prematurely. But until these conditions above are met, they will almost never SELL the product in volumes to warrant the depleting the startup budget and other resources on channels at this early stage.
That’s my take on some places NOT to invest your scarce early stage capital. Every startup budget situation is different, so these may not apply to you and there may be other areas critical to avoid spending capital on. If you have your own experience or wisdom to share on this topic please do so! Or if you have a question please post it as well. Either way, leave a comment below with your contribution to the discussion.
About Phil Morettini:
Phil Morettini is the author of the Morettini on Management Tech Blog and President of PJM Consulting. Mr. Morettini has an extensive C-level software and hardware company executive background. PJM Consulting provides management consulting and interim management services to technology companies.
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