Tuesday, March 23, 2010

For startups, it's money that matters (in different ways, at different times)

So you're thinking, "Of course money matters! Isn't that the point?" For startups. money means different things at different stages of development, and using it for the wrong things can be very dangerous. At inception, seed and early stages, money means investment in development and growth. The purpose of capital raised early on should be to develop the startup's products and services, do customer development, find a good product/market fit and have the means to pivot if you have to in order to find a good fit. However, for a good number of startups, especially in the dot-com boom days, early-stage money went for big offices, lavish furnishings, expensive cars and other unproductive uses. The goal of money in this stage is to invest in order to generate revenue.

At later stages, money can be used to invest in the business for rapid growth or, as Ben Horowitz puts it, to "crush your competition." It's also at these later stages that the emphasis shifts from plowing money back into the company to compensating investors for their investments and employees for their hard work. As I've written previously, successful startups have lots of exit strategies. If the company goes IPO, that provides the liquidity event for everyone. If the company is acquired, that may provide a decent return for the investors and something for the employees--it depends on the acquisition price. However, even if the company remains private and independent, it still has to put money back into the hands of its investors and employees.

It's at this stage where it's okay to start thinking about paying competitive salaries, creature comforts, and the other niceties of having money. If a startup continues to skimp on salaries, benefits and the like at this point, and if it refuses give investors a decent return, even if through dividends, it will lose key employees, increase employee turnover (which always increases cost and decreases efficiency) and tick off investors. Those startups that start cheap and stay cheap end up paying for it, sooner or later.

So money means different things, and should be used for different things, at different stages of a startup's development. Early on, use money to invest in the business; later on, use money as a reward.
Reblog this post [with Zemanta]
Post a Comment