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Saving Money On Startups

Jason Calcanis has written a post with almost twenty ideas for saving money in a startup. I agree that keeping the costs down is a critical part of doing a startup right, both because it allows the founders to dilute less and because it creates the right culture for the long term.

There are several of Jason's suggestions I'd like to second and talk about a bit.

Don't buy a phone system. No one will use it. - I remember a startup that we helped to incubate back in 1999 at Flatiron that made the decision to give everyone cell phones instead of buying a phone system. Today, you don't even need to do that. Everyone has a cell phone. Just make sure you get good cell reception in your office (if you have one). I wonder if there is a repeater that you could put into an office that works with all the major cell networks to ensure good coverage. The new cell phones that allow wifi phone calls like my t-mobile curve are also making that less of an issue. Jason suggests that you can save $500/year/person by avoiding a phone system. That can add up to a lot of money over time.

Rent out your extra space. - Our portfolio company Targetspot looked long and hard for 3-4,000 square feet last year and could not find anything that worked in the price range they could afford. Instead they took 7,000 square feet and are subletting a bunch of offices and cubes to other startups. Their net rental cost is much lower as a result and they also get the benefit of collaboration between other entrepreneurs and developers. Etsy has done the same thing with Make Magazine and a small group from Burda Media. There are some downsides to this approach. You have to collect rent, if the startup world got really bad (like 2000/2001) you could end up with more space than you need and nobody to rent to, and you could end up with subtenants that you don't get along with. But even with all these downsides, I think this is something startups should consider in markets where office space is tight and rents are high.

Outsource accounting and HR - As Jason says, this is a no brainer. Here in NYC, we generally recommend a company called Ambrose. They are a PEO. Your employees technically work for them and you pay them to run all HR (including salaries and benefits) for you. I think there are plenty of high quality PEOs to choose from and all startups should use one.

Don't waste money on recruiters. - I can't think of the last time one of our companies hired a recruiter. I am sure it's happened and maybe recently, but it's not something many of them do anymore. LinkedIn, in particular, has become an amazing way to recruit on the business side. There are times when it does make sense to hire a recruiter, particularly for a specific skill set that the company doesn't have in its extended network. Those times seem to be fewer and farther between these days.

Really think about if you need that $15,000 a month PR firm. - There are some really good PR firms out there and if you can get one of them to work with your company, then it may be worth considering it. But a mediocre PR firm is not worth it for sure. I encourage our portfolio companies to hire a person inside the company to be an "evangelist". That job includes blogging actively, reading and commenting and linking to other blogs, reaching out to the media and industry analysts and gurus, going to conferences and events, and generally getting the word out. That person can be young and not particularly expensive, certainly nowhere near $15,000 a month. And they have two things that a PR firm cannot offer. They work for you and they represent your company exclusively.

And I'll add one more cost saving idea because Jason asked people to do that.

Hire "utility infielders" in the early days - Hire people who can do many things in the early days of a company. Charles Smith at TACODA and Etsy and AT at Zynga both come to mind. They are people with a number of skills who have spent a long time in startups and can do everything and anything that's required. You can't afford to have specialists in a startup. Hire utility infielders.

Rule 1: Commit to your business. Believe in it more than anybody else. I think I overcame every single one of my personal shortcomings by the sheer passion I brought to my work. I don’t know if you’re born with this kind of passion, or if you can learn it. But I do know you need it. If you love your work, you’ll be out there every day trying to do it the best you possibly can, and pretty soon everybody around will catch the passion from you — like a fever.

Rule 2: Share your profits with all your associates, and treat them as partners. In turn, they will treat you as a partner, and together you will all perform beyond your wildest expectations. Remain a corporation and retain control if you like, but behave as a servant leader in your partnership. Encourage your associates to hold a stake in the company. Offer discounted stock, and grant them stock for their retirement. It’s the single best thing we ever did.

Rule 3: Motivate your partners. Money and ownership alone aren’t enough. Constantly, day by day, think of new and more interesting ways to motivate and challenge your partners. Set high goals, encourage competition, and then keep score. Make bets with outrageous payoffs. If things get stale, cross-pollinate; have managers switch jobs with one another to stay challenged. Keep everybody guessing as to what your next trick is going to be. Don’t become too predictable.

Rule 4: Communicate everything you possibly can to your partners. The more they know, the more they’ll understand. The more they understand, the more they’ll care. Once they care, there’s no stopping them. If you don’t trust your associates to know what’s going on, they’ll know you really don’t consider them partners. Information is power, and the gain you get from empowering your associates more than offsets the risk of informing your competitors.

Rule 5: Appreciate everything your associates do for the business. A paycheck and a stock option will buy one kind of loyalty. But all of us like to be told how much somebody appreciates what we do for them. We like to hear it often, and especially when we have done something we’re really proud of. Nothing else can quite substitute for a few well-chosen, well-timed, sincere words of praise. They’re absolutely free — and worth a fortune.

Rule 6: Celebrate your success. Find some humor in your failures. Don’t take yourself so seriously. Loosen up, and everybody around you will loosen up. Have fun. Show enthusiasm — always. When all else fails, put on a costume and sing a silly song. Then make everybody else sing with you. Don’t do a hula on Wall Street. It’s been done. Think up your own stunt. All of this is more important, and more fun, than you think, and it really fools competition. “Why should we take those cornballs at Wal-Mart seriously?”

Rule 7: Listen to everyone in your company and figure out ways to get them talking. The folks on the front lines — the ones who actually talk to the customer — are the only ones who really know what’s going on out there. You’d better find out what they know. This really is what total quality is all about. To push responsibility down in your organization, and to force good ideas to bubble up within it, you must listen to what your associates are trying to tell you.

Rule 8: Exceed your customer’s expectations. If you do, they’ll come back over and over. Give them what they want — and a little more. Let them know you appreciate them. Make good on all your mistakes, and don’t make excuses — apologize. Stand behind everything you do. The two most important words I ever wrote were on that first Wal-Mart sign: “Satisfaction Guaranteed.” They’re still up there, and they have made all the difference.

Rule 9: Control your expenses better than your competition. This is where you can always find the competitive advantage. For twenty-five years running — long before Wal-Mart was known as the nation’s largest retailer — we’ve ranked No. 1 in our industry for the lowest ratio of expenses to sales. You can make a lot of different mistakes and still recover if you run an efficient operation. Or you can be brilliant and still go out of business if you’re too inefficient.

Rule 10: Swim upstream. Go the other way. Ignore the conventional wisdom. If everybody else is doing it one way, there’s a good chance you can find your niche by going in exactly the opposite direction. But be prepared for a lot of folks to wave you down and tell you you’re headed the wrong way. I guess in all my years, what I heard more often than anything was: a town of less than 50,000 population cannot support a discount store for very long.

• Very interesting and profound… but I think they missed one critical step. Vision. We need to have a vision, with absolutely clarity, on where we are heading. How can you get to your destination if you don’t know where it is? I have met many (unsuccessful) entrepreneurs that are just “doing whatever I can to get rich”. That is far from a vision… and the results inevitably are far from getting rich. Conversely I know others that are planning to achieve X (X - is a very detailed description of their vision) by Y (a date) and are continuously measuring their progress to their destination. These people inevitably are far more successful.

  
  
  





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  Brett Says:
  
  
  
  November 24th, 2007 at 10:08 am
  
  

  That’s a good point, and one that many entrepreneurs fail to remember. It seems that the mantra of “build it and they will come” has become quite popular - especially with internet companies.

  
  

  As an entrepreneurship major at my University, I’m well aware of the benefits to planning.

  
  

  Another point I’d like to add is that not only are successful entrepreneurs continuously measuring their progress, they’re also updating their vision as the need arises.

I had the opportunity to chat with serial entrepreneur Mike Michalowicz over the phone this evening, and really enjoyed hearing his insights on small business and more specifically young entrepreneurs.  I asked if he was interested in contributing to the Startup Students community, and he offered up the great article found below. Enjoy!

Mike Michalowicz, Serial Entrepreneur

I recently received a notice congratulating me on donating a gallon of blood. I quickly did some research on Wikipedia and learned that the human body has slightly over a gallon of blood pumping through it. Clearly, if I gave a gallon of blood in one sitting I would be a goner. Shoot, even if I only donated one third of my blood (approximately 3 pints) in one sitting I might suffer some tough consequences. But since I donate one pint of blood at a time, my body hardly misses it and I can donate as frequently as seven times a year without missing a heartbeat (pun intended). My blood donations have quickly piled up and in a very short time I have given a gallon.

We’ve all heard that cash is the lifeblood of our business. I think it’s hard to argue otherwise. Shouldn’t we treat our money like our business’s blood? Just like a medical emergency, a business in need of fiscal attention often requires an infusion of capital.

Medical needs sometimes can be predicted and sometimes can’t. Regardless of the timing, with a pool of easily accessible blood reserves the chance for survival dramatically increases. Sometimes our business problems are predictable and other times they blindside the living crud out of us. Regardless of the timing, with a pool of easily accessible cash the chance for business survival dramatically increases.

That’s why you need to regularly “donate” business cash flow to your reserves. The best method is by taking your profit first. What do I mean by this? Every time money comes into the business, and I mean every time, a percentage is automatically transferred into a separate account. Just like a pint of blood, a healthy business will hardly feel it being withdrawn. I like to call this reserve the Profit Distribution Account (PDA).

How much money can be transferred to the PDA without threatening the health of the business? Most stable companies should be able to post a profit of 10% to 25% after all expenses. So trying starting with a low threshold, maybe 5% of every inbound dollar goes to the PDA. Over time slowly increase the percentage and monitor closely to see if your business gets woozy. Once you have consciously (more often subconsciously) adjusted expenses and cash outflow to sustain your PDA withdrawals, you will quickly accumulate a tremendous cash reserve. Be cognizant not to stow away too much money too quickly. Just like donating blood, the rapid drain of cash exiting from business operations will cripple or kill your organization.

Should tough times come upon your company, and they often do, you now have a source of funds that you’ve built up. The PDA’s dinero reserve will see you through these times. On the bright side, as these funds grow they will ultimately be in excess of any imaginable rainy day needs. At that point you should take portions as an equity distribution. Trust me, it’s a real nice way to reward yourself for running a healthy business. There is a nifty little process I recommend on how to do this, but I’ll save that for another article.

If you’ve never given blood, I strongly encourage you to do it. There’s no question it saves lives. If you don’t currently donate to your company’s PDA account, I strongly encourage you to start. There’s no question it saves companies.

You created a Web site for your business. You set up an e-commerce system to sell products online. You even created a blog. So why aren’t customers biting?

“You may have no GQ,” said Brent Leary at the Small Business Summit in New York. Mr. Leary is the co-founder of customer-relationship management-consulting firm CRM Essentials in Atlanta.

No, Mr. Leary isn’t referring to the men’s style magazine, but to your business’s “Google Quotient” or visibility and rank on popular search engines.

The best way to get noticed on Google? Establish yourself as an authority online in your niche. Here are four ways to get started:

1. Find publications and blogs by industry leaders and begin posting original thoughts regularly.

2. Review a book.

3. Choose your social-networking Web sites wisely.

4. Become an expert.

At the Seoul Digital Forum recently, Google’s CEO Eric Schmidt was asked to define the term Web 3.0. While he got a few laughs for the initial response he gave (quoted below), he actually provided some interesting elements to think about.




“Well, the Web 2.0 is a marketing term, and I think you’ve just invented Web 3.0″

- Eric Schmidt




The short video can be found here. The key elements of his answer:





• Focus on a different way to build applications


• Applications that are pieced together


• Applications that are relatively small


• Applications can run on any device (multi-platform)


• Applications are distributed virally (social networks, email)





The exact term (web 3.0) is of less importance. What is important is that we keep track of what is happening in the broader online world, because these evolutions are fundamental drivers of what is and will be possible with respect to open innovation and crowdsourcing. Multi-platform Mass Collaboration and Mashups will be key elements.

Is your business expanding rapidly? Or are you just starting out and can’t decide where to locate your business? Many young entrepreneurs face this problem: do I rent office space right off the bat or not? If you are going to be considering this, here are a couple things to think about and consider.

Is it necessary?

Is taking on the extra expense of an office space really worth the benefits? Sure it is nice to have a place to “go to work” but what’s wrong with a room in your house or apartment? With an office comes the expenses of: office furniture, electricity, internet, water, heat/AC, phone line, fax line, etc. The list really can go on and on. If it is not necessary to expand into office of your own, then save the money for other stuff!

Will it meet your needs?

Look at your business and its needs. If you business is close to my eBay company, then you may have other options. Our first thought was to get an office space to allow people to bring items to us. However, the main reason for the space would be storage. Being able to store everything their, package items, and ship out sounded great, but the costs didn’t! If you are looking for just a storage area and won’t be doing remodeling, then a small cheaper rent office may be an option for you. Yet, think about the alternatives. With our eBay business, we have been looking at the costs of a climate controlled storage unit. Renting a storage unit can be very cost effective if you are just strictly using it for storage. Rent a decent sized unit, add some shelves, maybe a folding table, and rock and roll! If you were to get a storage unit, look for a climate controlled unit so that you can keep your products or whatever at the right temperature- not too hot and not too cold. Also, be sure to look through the renting agreements for the units, some storage companies specifically say that no business can be conducted from a unit or modifications can be made to it, so you have to consider your options (don’t have people meeting you at the unit, make sure everything you add can be removed).

Split the office with others

Do you know another small business or entrepreneur who is looking to expand into an office? Strike a deal with them to split the costs of the rent, internet, electric, etc with their business. Depending on your location, you could easily split your rent/office costs down to a couple hundred dollars a month. If the space is big enough, split it between 3 businesses – it gets cheaper and cheaper!

The best way to bootstrap on office expenses is to not have one at all. If you are able to set up shop in your parents basement, your dorm room, your apartment, or a spare bedroom, your office can be real cheap!

Who else has thought about saving money on renting office space? An advantage for keeping your business close to your home is the opportunity to work whatever your want – day or night.

So, who has experience renting an office space? Is it fun? What kinds of costs are you looking at?

Increase Self Motivation

Posted By John Wesley On August 23, 2007 @ 9:05 am In popular, motivation | 29 Comments