The Cardinal Sin of Startups: Spending Money on Unimportant Stuff

Everybody reading this probably wants to be the next unicorn: a company with a tech base and product offering that simply propels them from one funding round to another, seemingly without effort, anxiety or unexpected setbacks. This is all good: if you don’t believe in your product and team, you’re probably better off sending out resumes.

Keeping Your Optimism in Check

However, chances are that instant success does not lie in your future. A great idea and a solid business model are obviously prerequisites for making it big, but they, on their own, will only get you to square one. Some companies that receive seed funding never advance beyond this stage. While there can be many reasons for this – unexpected IP issues, changes in the market, interpersonal issues among founders – by far the most common cause of failure can be summed up as running out of money.

Almost all startups will go through an initial stage where, even though everyone may be working their butts off, nothing they produce even comes close to a saleable product. This translates to all expenses, no revenue, and it’s rarely possible to predict how long it will take to get to a MVP, actual paying customers and positive cash flow. Until then, it’s all about a race between time and money, and far too many promising startups have lost this contest simply by making easily avoidable mistakes. The following two are discussed here, not only because they are seen so often, but because they are especially stupid:

Not Instituting a Formal Procurement Process

Far too much advice is already available on how young companies should manage their ordinary purchases to have to cover the subject in detail here. Unfortunately, simply spending money without having some kind of method for evaluating what you’re getting in return is still surprisingly common.

As it turns out, even simple decisions of this type often have deeper implications when interrogated. Let’s take the example of cutting down a tree: the knee-jerk response is usually that the cost of the lumberjack’s time is higher than the price of a chainsaw, so just buy the damn thing. This, however, may represent an opportunity to save money.

Can you rent a chainsaw for the day, or maybe outsource the entire task? Will you be cutting down trees on a regular basis, and if so, which model is actually best overall for your situation? Once these questions have been asked and the answers framed in terms of dollars and cents, you may well discover that either an axe or a bulldozer is the more economical option. That having been said, it’s rarely a good idea to skimp on synergistic resources, such as good broadband, testing/verification tools and access to knowledge bases.

Jumping on the Swag Bandwagon

Networking, company reputation, getting the word out: none of these will ever compensate for a buggy product or a cancerous balance sheet. Spending money on trade shows, upscale offices and flashy marketing materials before the fundamentals are in place has literally zero benefit.

Of course, printing a few T-shirts with the company logo on them and running a decent company website won’t send you to Chapter 11, and usually does at least some good. Splashing some new paint on the office walls might help to lift the employees’ mood. However, any kind of discretionary spending should be weighed very carefully while you’re still spending your investors’ (or even your own) money.

Perhaps the best example of getting this right comes from Amazon’s early days. Jeff Bezos did have some cash on hand, but he was also determined to spend it where it would count. So, instead of paying extra for furniture that doesn’t wobble, he invented the door desk. More importantly than saving a hundred-odd dollars, this demonstrated to his employees that keeping costs down was indeed important, an attitude that remains part of Amazon’s culture to this day.