In working with many startups, one of the biggest dangers facing them is, surprisingly, having money in the bank.
It’s one thing to bootstrap an idea because it forces entrepreneurs to be creative and flexible, although it can be frustrating not to have the financial resources to move aggressively or execute quickly.
And while money makes life a lot easier for startups, entrepreneurs also have to be careful about handling their new-found “wealth”. Since plunging into the startup world 10 years ago, I’ve seen too many spend money like it’s burning a hole in their pockets, buying products and services they would never have considered when there was no or little money kicking around.
For most start-ups, here’s “danger list” that should be avoided unless really necessary.
1. Office space, particularly cool, funky space. For whatever reason, too many startups decide the only way they’re going to be successful is moving from the basement or the spare room to an office space in the happening part of town, complete with exposed brick and a fridge full of snacks and soft drinks. It is based on the belief that attractive office space will attract talented people, while forgetting that an exciting idea is far more compelling.
2. Hiring a full-time marketing person. Most startup entrepreneurs are developers as opposed to marketers or communicators. As a result, they don’t understand how marketing works, how marketers do their jobs, and when they’re needed. Since entrepreneurs don’t have marketing expertise, they think hiring a marketer makes sense because, after all, every company should do marketing. The problem is many marketers are hired before they are really needed, and entrepreneurs don’t have the ability to assess how a marketing person is performing. Rather than hiring a full-time marketer, I would recommend hiring someone on a freelance or contract basis.
3. Hiring a PR agency on anything other than a project basis. Much like entrepreneurs are not terribly savvy when it comes to marketing, they have little insight into public relations. When they are looking to attract attention, entrepreneurs realize they may need a PR firm but the trouble is PR firms are looking to get what they need – an assignment with a healthy monthly retainer – as opposed to what the startup needs. My advice to startups when it comes to PR is to hire an agency on a project basis for a month or so. If the relationship is successful, the startup can hire the PR agency for another engagement when they’re needed.
4. Swag. There’s a mystery between a startup and the need to have swag – stickers, t-shirts, jackets, hoodies, pens, USB keys, bags, etc. Like cool office space, too many startups believe a sign of making it is placing a large order for swag. It may look good when your employees descend on an event with matching t-shirts but how much return does swag really generate.
5. New computers. Startups are dominated by geeks; geeks like new technology so if there are a few bucks collecting dust, buying a new computer, laptop or tablet is easy to justify. Truth be told, most of these new “toys” aren’t needed because existing devices are perfectly fine. There are, of course, exceptions to the rule. If your lead developer needs a more powerful computer to be more efficient, that can be justified. If, however, a non-developer wants a new computer so they can have run more tabs in their browser or create a PowerPoint presentation in less time, that should get the alarms bells ringing.
6. Travel. Travel is expensive. It costs money and, as important, time, and it can be a major disruption to have a key person out of the office when there is a lot going on. Travel to attend or speak at a conference seems like a great idea but it can often be a waste of time because it generates few of the returns (e.g. new contacts, potential customers) that are envisioned. While it is a good idea to “get out of the house” once in awhile, startups need to think about things through. Another rule should be not sending more than one person to an out-of-town event, which is complete overkill.
7. Hiring too many friends. On one hand, it’s good to hire people you know and trust given the time people who work for a startup spend together. The danger is people are hired based more on friendship than how good they are at doing their jobs. Given each hire for a startup is crucial, employing a friend who isn’t as good as another candidate is a mistake. Another reason not to hire too many friends is it can be difficult to fire them if they’re not performing well given how it could impact the friendship.
Are there any other things startups should avoid spending money on?
