Be Careful not to be Penny Wise, Pound Foolish

Posted on Nov 29, 2010 | 67 comments


Justyn Howard, founder of Sprout Social has a blog post that he’s written about his experiences of migrating from scrappy tools to more efficient ones (i.e. Using Balsamiq instead of SnagIt, Website Optimizer over just Google Analytics and FTP).

It’s a great topic, his post is well written and given that he’s going through it right now in his startup it’s worth reading his point of view on the topic.

Here’s my take:

Penny Wise, Pound Foolish
There is a British saying I always loved, “penny wise, pound foolish.”  I took it to mean, “making decisions with small amounts of money (pennies) that end up making bad sense for affecting larger amounts of money (pounds, as in Great British Pounds).”  I thought of it as people who cut corners on small costs but paid dearly in terms of lost productivity on expensive staff.  Penny wise, pound foolish.  I love this saying and what it implies and I use it often.  Startups often make this mistake.

I Love Scrappy
Don’t get me wrong, I do think an important sign from startups is their ability to keep a startup culture going for as long as possible and one sign of this in the early days is scrappiness.  Those who are old enough will remember stories about Microsoft that even as it was going through explosive growth Bill Gates still flew economy and the parking lot was first come, first served.  It was a sign of honor to see whose cars were closest to the entrance and whose were still there when you left.  Andy Grove, for many years the CEO of Intel, famously sat out in an open plan office.

And you all know the stories of the companies that assemble their desks from spare plywood or old doors, working in the up-and-coming part of town rather than in the heart of the financial district where all the nice office are.  It isn’t always necessary but it’s a mindset.

Like everything, I screwed this up in my first startup.  I had come from a world where I was nearly a partner at Accenture before starting my first company.  I was used to being allowed to fly business class and staying at nice hotels.  Our first big institutional round of VC was $16.5 million and we seemed likely to raise another $40 million within the first 18 months of operations.  So when I attended the Fortune CEO conference in Paris I stayed at the venue: George V (The Four Seasons) without much thought.

I took business class on the Eurostar over and justified it because I could get more work done on my computer at bigger tables.  It was probably true, but I created the wrong mindset – the wrong culture.  I was too much Accenture, not enough Startup.  I always say that it takes 18 months to un-train a big company employee from their bad habits when they join a startup.

I changed that quickly when the market shifted and I had to lay off more than 80 people – many of whom were friends.  We went “nuclear” and slimmed down to 33 people (yes, I know, still large by today’s standards but this was 2001), raised $10 million and we built a real company.  I learned everything I know about startups in these lean years: 2001-2004.  I felt like I had survived The Great Depression and I never wanted to go there again.

I started flying RyanAir or EasyJet (the European equivalents of Southwest Airlines) anywhere I went.  If I did have to catch a British Airways flight I was in the back of the plane near the toilets.  I frequently travelled to Frankfurt, Germany but found it much cheaper to stay 20 minutes south of the city in Neu Isenberg.  Scrappiness became a badge of honor.  It wasn’t enough to just stay in Neu Isenberg but I found a pizzeria that had rooms to rent above the restaurant for just 35 Euros / Night.  They were clean and since when I travel I’m normally in my hotel at 11pm and out by 7am wasting money on hotels seemed stupid.

Our company developed a cost-conscious mentality.  We switched offices to a cheap 1-year sublet of a company that had too much space during the dot-com boom.  After a year we played hardball and said we’d move out unless they gave us 20% off of our already low price.  They had no options and the truth was that I was willing to move in order to drive the costs down further.  We were on a path to prove to investors we could be profitable and driving every penny out of our cost structure mattered.

Cost conscious is obviously how most companies start – or should start.  I often advise young companies against the dangers of raising too much money too early in the company’s existence.  I know from experience – it helps fuel the wrong culture and it is very hard to rebuild your culture once it is set.

Scrappy for Scrappiness Sake is Dumb
But Justyn’s post touched on a nerve with me because I do see people take the startup, scrappy culture thing too far and he hit the nail on the head in advising people to think about efficiency and not just scrappiness.

Once a company has raised $2-3 million dollars I often advise them to get an office manager.  It seems like an extravagance but if the person also picks up scheduling travel, booking meetings, dealing with company admin and helping with basic accounting / financial tasks it can be a huge productivity boost.  And this is especially important since the people who get sucked into this admin the most are the founders – the people who you most want focused on high-value tasks.  I will quote one portfolio company CEO who said about his office manager, “Mark, this is the most important hire we made last year. I have freed up so much of my time to focus on the important stuff.”

Another area where founders sometimes spend too much time is accounting. In the scrappy phase it’s fun to be the person who set up QuickBooks and to watch every penny that goes out the door.  After you start to grow, you can still watch every penny but your time is much better spent on finding new pennies to come into the business than splitting hairs on how to best establish your general ledger accounting codes.

Hire a part-time accounting clerk to do the data entry and prepare the monthly books.  If you’re business has complicated accounting (like many ad network businesses) and if you’re raised enough money to warrant it – a great VP Finance is worth his/her weight in gold.  Even better if he/she can double as a VP Operations & HR.

In his post, Justyn mostly speaks about the toolsets you use to manage your products and those are important, too.  He’s right about the need to eventually get dedicated QA staff while not absolving programers of unit testing & usability testing.

Be Efficiently Scrappy, But Maintain your Startup Culture
In my own startup I went too far.  I kept trying to drive costs down and started making stupid decisions.  We attended a conference in France and I asked teammates to double-up on hotel rooms.  I doubled-up, too, so I figured it was fair.  My team wasn’t impressed and I think it had a bigger hit on morale than the cost benefits we got.  They were fine traveling RyanAir and then having to bus an extra hour to get to the event but they wanted their own room to crash in late at night.  A small refuge from a busy day of shaking hands and demo’ing products.  And I should mention that many of my sales staff were in their 30’s, not 20’s so this made it harder.

When I travelled to Frankfurt, the hotel in Neu Isenberg wasn’t good enough – I pushed to stay in a place that was 30 Euros.  I traveled out there with our then head of sales & operations (and my business partner) Stuart Lander.  We stayed in the middle of January in a “hotel” that turned not to have showers in the room – you had to walk down the hall to a community shower.  We literally had to walk outdoors in the snow to the shower alongside Turkish construction workers walking in leopard-print underwear.  I can’t make this stuff up!  I had reached bottom.  I had pushed too far.  It provided a funny life story but at the time it didn’t feel that way.  I’m lucky that I had Stuart with me as proof that this really happened.

It seriously was a visceral turning point for me that we had pushed things too far.

You need to always think about the trade-off between making your most valuable assets (your highest impact people) more productive and maintaining your startup culture.  There is no “right or wrong” as this will be a judgment call in each startup based on capital raised, stage of company, number of customers, complexity of your business, etc.

Some companies argue that having personal chefs allows their team members to stay more focused and productive on work, others believe it is an unnecessary extravagance and sets the wrong tone.  I’m frankly not really sure on this one but each company needs to think about what messages they send with the decisions they make.

Having the wisdom of having swung the pendulum too far in either direction I now pay close attention to this with the companies with whom I now work as an investor or advisor.  Constantly ask yourself whether you can improve productivity of your most important contributors by minor investments in other people, processes or tools.  Whenever you approve new expenditures ask yourself, “will this be perceived as being too extravagant for the stage of our company?”

These are always judgment calls but erring in either direction is a mistake.  Thank you, Justyn, for bringing up this important topic.

Photo courtesy of Pat Page via Flickr.

  • Josh Webb

    I think that the bad decision-making that you discuss comes largely from over emphasizing either revenue _or_ cost. Conversely, there is a lot of value that comes out of looking straight to profit when evaluating your core decisions (keeping in mind that culture is an investment too).

    Further, I think that it is important to identify low-hanging fruit when making cuts or additions to the balance sheet. Cutting large unnecessary costs and re-directing/staffing more rote tasks can both make sense in the right environment. Putting calories into the nitty gritty can work, but the efficiency goes downhill fast.

    Take a good hard look at the P&L every quarter and iterate. Never assume that what is there should be there or assume that something new shouldn't be. Let the present and the future guide the future!

  • http://twitter.com/Justyn Justyn Howard

    So glad to get your perspective on this Mark. Some of your examples made me realize I might be leaning the wrong direction on both ends with a few things. Doubling up on hotels, while looking at a more expensive lease to be closer to the trains. That one I'm still torn on – my engineers would love to be near the train, but we'd save about $40K a year being a bus ride away.

    I'm still hoping you find the time to write a book someday. I'm constantly reading (just finished the TechStars book), but this blog honestly has more practical lessons/advice than any other resource.

  • http://bothsidesofthetable.com msuster

    Thanks, Justyn. If I found the right help I'd publish. I even have some ideas about how to make it different than the blog. But I don't know the first thing about publishing and since I have a day job (VC) I don't really have the time to investigate. One day!

  • http://twitter.com/Justyn Justyn Howard

    I was just thinking, you could go the Seth Godin/37 Signals route and publish your best posts/essays in book form – with some of your series strung together. But the idea of making it different sounds cool too.

    I self published two books on sales technology a few years back, but it was more of an exercise than an ambition. I could put you in touch with the guy who made it all flow and did my editing – but you'd probably want something more turnkey.

    In any case, if I can help make it happen, just let me know. Would be glad to exchange some of my spare time for all of your help this past year.

  • Josh Webb

    I have seen a middle ground before where the company takes a chunk of that $40k savings and gives it to bus-riding employees in the form of mass-transit/travel vouchers. I think if you buy the vouchers in bulk, you can even negotiate a discount. Depending on the surrounding area, moving can also mean lower parking costs (if you were near mass transit, you may need less spots).

    If the move was important enough for them, you may be able to change the office environment a little and set it up so that you used less sq footage. There are so many intangibles!

    And yes, Mark, you should definitely look into a book. Guy Kawasaki basically republished his blog into a book… there wasn't much new content, but that didn't stop people from buying it! (http://www.amazon.com/Reality-Check-Outsmarting-Outmanaging-Outmarketing/dp/1591842239/ref=sr_1_1?s=books&ie=UTF8&qid=1291096358&sr=1-1). Maybe he'd have some advice on how to execute on that front :)

  • http://bothsidesofthetable.com msuster

    good idea. maybe I'll ask Guy

  • http://twitter.com/rahulgchaudhary Rahul Chaudhary

    Mark, There are tools/services available that will help you convert blog posts into e-book. What do you think about using it and publish e-book? Here are some of those tools

    http://anthologize.org/

    http://xhtml-css.com/wptex/

    http://www.zinepal.com/

  • http://weebehave.com Travis Ryan

    Another nice post. Thanks Mark!

  • http://reecepacheco.com reecepacheco

    We've bootstrapped from the start, so we've had to be thrifty by default.

    That being said, you're right to point out when it's right and when it's wrong to spend. It's a constant battle for startup founders. Luckily, my team is cheap by nature and don't expect much. We're all in it together.

    Helps that we're all friends, too – makes sleeping 2 to a bed [sic] a lot easier on business trips.

    Ultimately, my decision-making hack is just trying to find balance between team productivity and thrift. Anytime I can take a hit to keep my team feeling good and working well, I'll do it. So despite not having a salary, there are times that I pay for stuff out of pocket that I could easily put on a corporate card. My team may not notice one way or another, but it feels right to me.

  • http://reecepacheco.com reecepacheco

    Unless the cheaper location is going to come with a gym, a masseuse and a waterslide, pay up for the better location.

    Bad commutes = grumpy people = workplace resentment.

    My 2 cents.

  • http://www.jasonnazar.com Jason Nazar

    great post Mark, i think about this A LOT. Here is my list of what To and NOT To spend on

    Pay more for employees, pay less for recruiters
    Pay more for ROI marketing, pay less (nothing) for PR and brand marketing
    Pay more for office space, pay less for office furniture
    Pay more for office moral (and you will) pay less for disgruntled staff
    Pay more for variable costs, pay less for fixed costs
    Pay more for everything that makes money, pay less for everything that takes money

  • http://www.sc2review.com Eric | Starcraft 2 Strategies

    There are so many examples of this – people get caught up in the details and forget about the big pictures. Buy a cheap laptop for your programmer, and then it ends up being a waste of his time – much more wasteful than dishing out a little more for a higher end system.

  • http://twitter.com/ColinHayhurst Colin Hayhurst

    Nice post Mark. I love scrappy too but like you I sometimes used to push things too far. The company I ran was completely bootstrapped so it was scrappy all the way to exit and beyond: A 10x profit multiplier on the earn-out made flying economy very rewarding!

    Our clients, virtually all large industrial corporates and R&D organisations, were often perplexed why we always flew economy. We sold in countries across the globe and deals only got done face-to-face (closing software sales at $20k per year needs to be done by pressing flesh) so we racked up many miles. Explaining to clients that flying economy allowed us to employ 25% more developers and support staff helped them understand how it benefited them: Even if their corporate mindsets still struggled with the concept of “slumming” it.

    Since long haul flights were often a great opportunity to concentrate on some important uninterrupted work the seat did not really matter too much: When one is wrapped up in thought or preparing some important document, what is going on around one does not get noticed.

    Oh, yes, and staying over a Saturday night would often knock off 75% of a flight cost to the USA. Not very fair on the family, it's true, but another great saver and an excuse to explore American cities on a Sunday.

  • http://twitter.com/mikeyavo Michael Yavonditte

    I love the post. One way I think about things is in terms of nourishment. You always want to properly “nourish” an idea. There are different levels of nourishment: barely alive, steady as she goes, and flying high.

    A rough idea with the wrong execution – you want to barely nourish, learn from, fix and move on to a better idea or execution.

    When the new execution launches, you look at the data, if things are better, then the idea gets more nourishment. Could be in form of personnel or some other type of capital expenditure.

    When you really achieve product-market fit or “traction” then you properly nourish the idea because it is likely time to step on the gas because now you are really flying.

    Improperly nourishing a good or great idea is a terrible mistake. Under most circumstances.

  • http://twitter.com/kmamas Kostis Mamassis

    what is wrong with Turkish construction workers walking in leopard-print underwear anyway? :)

  • http://twitter.com/L1AD LIAD

    There is something quite romantic about the uber scrappy stage of building a company.

    Sleeping in train stations to save on overnight hotel rooms.
    Cleaning the office, sweeping the floor to save on a cleaner etc.

    You know what the say about friendships forged in war…..some goes for friendships forged in startups.

  • http://techrice.com Leo Chen

    We tried hard to cut costs as well at my last startup. Do you think there're situations where founders sacrifice too much? We went 2yrs without founder pay because the economic crisis meant we had to make 1yr's burn stretch to 2yrs. Thinking back, part of me wishes we had paid ourselves something so I would've had more breathing room when things turned sour. One thing remains true though, you can't save your way to success. Now I'm at Amazon, a big yet frugal company, some people complain but I appreciate the scrappy mentality. Unfortunately it's impossible to avoid overhead & process in a big company, all the money in the world can't buy the agility, passion and excitement of running a 4 person startup…

  • http://InnerTeub.com/ LizScott

    I worked for a consulting firm that went into Chap 11 in 2008 (and parts of it were subsequently acquired later that year). In the years leading up to Chap 11 filing, things were lean – most prominently I remember not being able to get a new mouse for my computer — the corporate expense team told me that was an unnecessary expense, as my laptop had a keypad that functioned just fine. And you know what? That was ok. If little decisions like that meant I got a raise at the end of the year, fine by me.

    (I do remember our CEO at the time encouraging us to “Take a taxi, not a limo” and thinking “The hell? I can't even get PARKING reimbursed, let alone cab fair. Who's taking an effing limo? Sheesh”)

    I now work for a different professional services firm, and it's really amazing to me the things that get expensed without a second thought. Coming from a place where the attitude was “well, the coffee creamer in the break room is gone, but at least the [very modest] bonus pool is funded, so…” , it was like whiplash to me to have coworkers chide me for staying at one hotel when a block away I could have booked the Ritz. Like you said, it's all about culture. I'm not going to lie, I prefer staying in the Ritz versus not, but what it says to me about the company is not necessarily something I'm comfortable with.

  • marklanday

    Mark,
    Nice post and Happy Holidays. As an executive recruiter, I see penny wise and pound foolishness quite often in not retaining a recruiter to find top talent. The founder/executive time to conduct a thorough search to save on recruitment fee, in addition the trade-off of not gaining your most valuable assets (your highest impact people), and settling for the best person looking for a job or the best person in your network vs. saving on recruitment fees results in short term thinking. For example, in recruiting a VP Sales, utilizing a recruiter for a sales executive who is going to preform just 5% better would cover most of the cost of recruitment fees on the first $1million in sales and the benefit becomes exponential as the company grows. In short, I agree if high impact people are the most important asset to a company, it would be penny wise and pound foolish not to allocate resources to attract such.

    Mark J. Landay
    Mark@DynamicSynergy.com

  • marklanday

    Jason,
    You get what you pay for. As a former lawyer, I am sure you can appreciate why top lawyers get paid more. Same goes with top employees and other top service providers (recruiters). I agree keeping fixed cost low is import and that paying more for everything that makes money, pay less for everything that takes money. Sometime it takes money to make money, including paying service providers to provide you with the best services, be it recruiting top talent, or doing the legal on the next round of financing or big deal your going to close. Hope all is well.
    Wishing you continued success and a Happy Holiday season.

    Mark

  • http://bothsidesofthetable.com msuster

    I tend to agree. Commutes matter. But any middle ground? Like short commute to train but less nice office?

  • http://bothsidesofthetable.com msuster

    You're at the age & stage where sharing a hotel is OK. Both in terms of your youth and your fund raising to date. These things will change.

  • http://bothsidesofthetable.com msuster

    Thanks, Jason. Great list. Here are the two I disagree with (you would expect no less ;-))

    I think PR is one of the most critical areas of a startup. I think often the best is to hire a parttime employee to handle PR. Bill Gates once famously said, “if I were down to my last dollar I'd spend it on PR.” Or maybe that was me? Can't remember ;-0

    I think office chairs are incredibly important. Over time you realize how much the human healthy depends on good ergonomics and how bad posture can affect you as you age. I think this is important to get right. Maybe you can solve cheaply (e.g. used stuff, liquidations) but this hits hard at morale since people work long hours.

  • http://bothsidesofthetable.com msuster

    When you're a hammer …. ;-)

  • http://bothsidesofthetable.com msuster

    exactly. I wish I has used that example. thank you.

  • http://bothsidesofthetable.com msuster

    I did more than 12 years of international travel (100k+ miles / year) in economy. At 42 I can't do it anymore! More than 7 hours and I need more space. But your mentality for a startup is totally spot on.

  • http://bothsidesofthetable.com msuster

    Having seen your offices – mostly the elevator & part of town – I know you take cost control seriously ;-)

    Look forward to seeing the new product.

  • http://bothsidesofthetable.com msuster

    Having seen your offices – mostly the elevator & part of town – I know you take cost control seriously ;-)

    Look forward to seeing the new product.

  • http://bothsidesofthetable.com msuster

    LOL. I felt so out of place without my pair ;-)

  • http://bothsidesofthetable.com msuster

    I must tell you that I talk about this all the time. The friendships we made (which did feel like they were during a war) are for a lifetime because we were “in it together.” Thanks.

  • http://bothsidesofthetable.com msuster

    “all the money in the world can't buy the agility, passion and excitement of running a 4 person startup” … great quote!

    re: paying – I asked our senior management team (4 people including me) to not be paid for about 5 months when we were fund raising and running out of cash. I wanted to preserve every penny for the team (especially those living month-to-month) and to show investors we were committed. We could have held out another 3-4 months and then I would have had a revolt!

    In the end (after we had raised $10 million) I took the 4 guys to a $3,000 dinner as a thank you for their (our) sacrifice. Was worth every penny.

    Hope you're doing well!

  • http://bothsidesofthetable.com msuster

    Yeah, and the problem with consulting is that often those Ritz bills are passed on to clients. I'm not suggesting at your firm, but it is common in the industry.

    BTW, not reimbursing for parking sounds like a bit too mean!

  • http://bothsidesofthetable.com msuster

    Thanks, Mark! There are definitely times where a recruiter makes sense. 100%. And there are times where startups rely too much on them. The answer, as always, is in the balance of the two.

  • http://twitter.com/Jon_Wetzel Jon Wetzel

    Thanks for giving me the flashback memories. Being a start-up person is all about being scrappy…it's how good your management skills are that let's you know when and where to turn it off.
    I remember running a lab doing 12 million a year in business and still fixing the toilet in the ladies room when it kept running just because I didn't want to see all that water being wasted.

  • http://twitter.com/Jon_Wetzel Jon Wetzel

    Thanks for giving me the flashback memories. Being a start-up person is all about being scrappy…it's how good your management skills are that let's you know when and where to turn it off.
    I remember running a lab doing 12 million a year in business and still fixing the toilet in the ladies room when it kept running just because I didn't want to see all that water being wasted.

  • http://InnerTeub.com/ LizScott

    HA- yeah, it was bad times when the parking reimbursing went away.
    I should have clarified – my role is actually internal to the firm now, so the company is footing the bill. I don't mind passing the expense the client if I feel that I could honestly look the client in the eye and explain every fee, but when it goes into the corporate sink hole, it feels …different. But anyway, it's absolutely a cultural thing.

  • philsugar

    Its great you've lived both sides of the table on this as well! What a great comment on it taking 18 months to rid big company people of their bad habits. You took cheap to a whole new level!!

    I've changed my philosophy on this over the years I now believe you should: get your own hotel room, stay at the show hotel, pay yourself well (you'll never get any credit for underpaying yourself), have a book-keeper.

    I've always bought the cheap tickets, and stayed in Hampton Inn places (clean, new, basic). I've never understood luxury travel for business. If you're traveling you should be working and you can't tell difference what hotel room you're in when the only view you have is your eyelids. When I stay at the nice hotels for shows (because you can network and pop up to your room to work) I don't get it. I can park my own car, I've schlepped my bag a hell of a lot further than from the lobby to my room.

    I think the big thing is don't skimp on anything that has a tangible benefit. First and foremost is your people should be working with the best tools available period….and you can't hire above average people for below average pay.

    When the benefits start getting squishy, you're doing something “because you want to look big”, or you feel that's beneath you that's when you're going to the other side.

  • philsugar

    I've never had any luck with a PR firm….maybe an internal person. The times when I've gotten the most press is when I was concentrating on it myself and we caught a couple of breaks.

    I agree with you on the office furniture. Good chairs a must, and I just sprang for a desk that raises and lowers for somebody that sits behind the desk a ton of hours.

    I also think you should spring for really good tools when you hire a new person. I've changed on that as well. I used to think it was “scrappy” to have a new person show up and scrounge for their stuff. Now I know its shabby. (and just lazy) That first month is critical.

  • http://reecepacheco.com reecepacheco

    Well, I know we're going to get funded, but are you saying I'm going to grow

    up, too?! ;)

  • jptucker

    Your argument is another great reason for starting companies when you're young. As a recent college graduate, I can say with certainty that I'm willing to accept a significantly lower standard of living and working than most seasoned professionals. But as a traveling analyst in a major consultancy, like you I feel myself getting slowly accustomed to the pampered lifestyle. Hopefully I can use the balance of all these points I accumulate on the road to offset the cost of travel once I break off to do my own thing!

    And as some of the other commenters have remarked, I'm also waiting eagerly for your eBook :).

  • http://twitter.com/AbsoluteBrand AbsoluteBrand

    Mark,

    Great post, great advice!

    I remember how exciting it was to move to the shiny office building with networked espresso, only to discover we lost that lovin' feeling from when the work stations were stacked atop each other and we shouted ideas across the room. Like adolescence to adulthood it was an awkward at best, but a necessary transition that all successful start ups must make and endure.

    The magical, frugal, start up ecosystem, that nurtures genius, must inevitably give way to practicality and profit. I'd love to see a follow-up post from you and others with insight on how to survive the transition.

    Thanks again Mark for your insightful post!

  • http://twitter.com/andreaswilkens Andreas Wilkens

    Great posts and hits the nail – experienced the cost reducing part too. At the end of my optimizing process, we took sandwiches and beverages with us to save the breakfast costs and stayed in really shitty hotels in Berlin.
    Ironically there was no need to do so – just the habit and a bad feeling to spend more.
    It is hard to know when to stop optimizing, as there is no “STOP” sign before this turns into negative results – like you described above with demotivating the sales guys in the 30´s.
    My personal experience , a part of my entrepreneurial spirit is to optimize all things in your business. I think part of the reason is, if you want to do something great and new , you have no real guidelines. There is is no “startup manual” which you can consult for new things.
    Thanks for all these great blogpost. I really enjoy them as I see many things I recognized or did and thought – I am the only guy who had experienced that.

  • http://www.hadleypartners.com/InReelTime/ Meganlisa

    I was going to comment on your last post – perhaps my favorite you've written but got distracted by this one.

    So, a question (which also relates to a comment below) – marketing, PR and the like? When and how much is the right amount? Is it a good use of funds?

    If I hear one more pitch that discusses using only “viral” marketing…

    A few companies make it work (twitter, many online gaming companies/communities, etc) but many of them don't.

    Thoughts?

  • http://jaycaplan.wordpress.com Jay Caplan

    In medical device startups, the penny-wise pound-foolish decisions mostly relate to capital spending – what test equipment should we buy and when, a soft-side small clean room vs. a larger facility build-out, etc. I know one startup that built out a complete animal lab with state-of-the-art operating rooms, that mostly sits unused. It takes experience to recognize when spending is efficient or extravagant. Thanks for the post!

  • http://www.nosnivelling.com daveschappell

    Great post, Mark — reminds me of a famous 'Shrimp vs. Weenies' e-mail (delivered to folks at Microsoft by Mike Murray — he was the founder of Unitus as well, where I met him):

    I never worked at Microsoft, but that 'shrimp vs. weenies' memo talked about what type of company/culture/spending they were hoping to stay focused on, as they grew Microsoft:

    http://digitaldaily.allthingsd.com/20090122/microsoft-cutbacks-the-1993-shrimp-and-weenies-memo/

  • http://twitter.com/petelehrman Peter Lehrman

    My mentor and teacher from Stanford Andy Rachleff (and CEO of Kaching) lives by a similar credo: spend freely on what's “strategic”, spend like a miser on what's “tactical”. The challenge is sometimes figuring out what's tactical vs strategic, and it can be more complex than it looks in certain cases.

    For me, I've boiled it down in a few areas so far:

    - recruiting awesome talent: strategic (spending on headhunters is a no-brainer if they get you the right guy 6 months sooner)
    - having excellent software and hardware: strategic (if my team wants Outlook for email, done. Salesforce.com for the sales team, done. Two flatscreen monitors on their desk so they can crank, done.
    - having perfect accrual accounting in QB: tactical. Get it 90% accurate, the 10% is massively diminishing returns until you have a few mill in revenue at least
    - having perfect graphical websites: tactical. Get your content right, your positioning right, don't stress over blue vs orange or perfect looking design, it doesn't matter. Content over style.

    As Mark said, “Constantly ask yourself whether you can improve productivity of your most important contributors by minor investments in other people, processes or tools.”

  • http://twitter.com/billmcneely Bill McNeely

    After closing up 3GPower2 and now moving onto Log Dog Jobs, my co-founder and I talk about spending money wisely. Its amazing when it is your money you seem to constantly ask if you really need something or if a service provider is really worth it. I also liked your comment about friendships forged in war. My co-founder Brian and I met on 9/11 ,our first day in the Army and have been friends ever since!

  • dereklicciardi

    At my current contract, we have computers that are corporate issue Windows XP machines from 2004. I'm serving as a senior developer and they pay me well so I cannot complain but your post strikes me because a company that employs technology professionals should not skimp on their computer yet many do, especially larger corporations. My computer is a device that I sit in front of 8 – 10 hours a day. It is how I convert the company's money into value. My productivity is directly derived from the quality of the tools I get to use, including my computer. I'll never understand why a company would take the stance that it is ok to hire a programmer/developer and then hand them a six year old computer. It's like signing a professional athlete and then making them train in a grade school facility.

    Along the same lines, I see companies hire sales people and then budget next to no dollars to support their efforts. They wonder why they wasted 9 months of their time with the person when they hobbled them with inadequate tools/funding to do the job.

  • http://www.facebook.com/profile.php?id=747972570 Dan Deppen

    This can definitely be a tricky issue. You want to establish the right kind of cultural norms. But push too far and you damage morale and the management comes off just looking like idiots.

    This summer we had a marketing person handling our email list manually. It took her hours and hours each month to get the list right. For less than $20/mo we could have used Mail Chimp or Constant Contact or whatever. Considering her time was worth more than $5 per hour, it was a pretty bad use of funds.

  • http://berislav.lopac.net Berislav Lopac

    The trouble is when the founders (i.e. senior management in the 4 person startup) are living month-to-month…