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Have A Throttle

July 5th, 2012

Starting a company is an exercise in persistence and resourcefulness. How do you surround yourself and keep great employees? How do you keep your company adequately financed? What do you do when something goes wrong? All these challenges are part of building a business and great entrepreneurs find ways to handle these issues.

At the center of all this is watching expenses and balancing spending against pushing the growth of your organization. Most people will tell you that you need to spend money in order to make money, and I would agree. You need money to be able to create a fast-growing company that is hiring good people and marketing to drive new sales.  This is particularly true in software. You have balance product design and engineering before you can sell anything; so adequate finance, hiring, and marketing budgets are critical.

I have found that looking at spending like a throttle on an engine is really good analogy. You need to be able to quickly slow and speed up based on your current circumstances. I say “current” circumstances because in a startup these circumstances are changing constantly, a true roller coaster.  The important thing is to build in some flexibility to control cash flow for your company. I’ve added a few strategies that have worked well at Ucloser below:

Accounts Payable – This is a big, obvious one. Work with vendors that will allow you some flexibility in payments on bills. Lawyers, accountants, and other large firms are great for this strategy.

Make sure you establish this in the relationship early on and also build personal relationships with these partners to create rapport. Believe me, you will need these relationships in the tough times when bills are running behind.

Independent Contractors – Early on the majority of the people you work with outside of co-founders and core employees should be independant contractors. This does several things for you and your young business:

  • Creates a smaller cash burn than a full time employee because they only work for you essentially part-time.
  • Creates a strong incentive for productivity when you are only paid for work as it is completed.
  • Makes it easy to fire someone if they are not doing good work or you need to make cuts. Simply don’t renew them for any more work.
  •  Last, allows you to explore different types of help without any long term commitment. Maybe you think you need a new designer or an extra QA person? Try a contractor out first.

Equity or Deferred Payment  - Another way to watch your cash flow is to work in some deals where payment is tied to equity or some form of deferred compensation. Tie in extra compensation to funding milestones or run a cash note that can convert to equity in the next round.

When discussing the deal with any potential partner or hire, make sure they know this is an option you would be open to exploring. This could alllow a structure you may have not considered earlier. Still, make sure you save the equity deals for the best of the best, the people you are dying to get on your team.

Office Space – This ties into accounts payable with vendors, but I would consider extra flexibility in this department. Maybe you can start at your house for the first few years? Maybe you can work in some unused office space of another company? Whatever you do, don’t get yourself stuck in some long-term commercial lease right away where you are paying outrageous late fees and penalties for a missed payment.

As you are building your business, expect things to change along the way and build with that in mind. The more you can keep your throttle or cash burn low, the more options you create for you and your business. Want to build a new product or change your strategy? You better hope you have built in the flexibility to do that, because if you are driving too fast you might just wreck.

On the other hand, be ready to push the throttle forward when you need to. Be ready to make some key hires for sales or bring on a critical design and marketing firm you need help from. Either way, understand what you can handle and when you need it.

 

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