Best Uses of Business Startup Funds
August 12th 2020
Congratulations! You saved, borrowed, and/or successfully landed an investment from others to get your business up-and-running. You’re officially an entrepreneur.
And now you’re wondering how to make the best use of the funds at your disposal, to grow your company and set it up for long-term success. There are a million different ways you could spend it, some based on your industry and product or service offering, but what are the best ways to leverage it and, in contrast, how can you avoid wasting it?
Several seasoned entrepreneurs and investors offered the following advice:
Marketing that drives sales
Sometimes it’s hard to tell what that involves, but Laura Bell, founder of The Point Consultancy, which offers short-term access to expert consultants, said, “Invest in targeted messaging, relevant content, and a solid lead funnel to sell your product.” Glossy photos and brand videos aren’t going to do that and aren’t worth the expense, she says. Every dollar invested in marketing should ideally generate at least $1 in sales.
Jacob Rosenberg, founder and CEO of Tajima Direct, which provides direct-to-consumer polarized lens replacements, said, “only spend on demand creation and finding product market fit,” rather than “trying to find demand.” Some of the cost-effective ways of testing demand include asking for Beta test users or offering product pre-orders, he said. “By experimenting and starting your spend on the demand side, you can get a much better sense of how much to spend on the inventory, infrastructure, and other supply expenses.”
According to Bell, “If your startup relies on technology, which most do, in-housing the tech from Day One has always been proven to be more successful, in my experience. Finding a team [that is] fully dedicated and work collaboratively as a team, rather than outsourcing to a company that has other priorities may be more expensive, but pays off in the long run.”
It’s hard to balance hiring qualified pros with high salaries versus more junior employees who lack the experience or know-how. You need good, experienced people but sometimes you can’t afford them, explained Bell. A potential solution is hiring talented consultants. “Using well-chosen consultants with experience in the field, who can help you onboard the team [you need] when you’re ready, will help bridge the gap.”
However, Baron Christopher, a turnaround and growth strategy consultant with RedBaron Consulting LLC, is an advocate of finding and retaining skilled team members from the start. “Rewarding highly experienced and innovative executives with bonuses or commissions and other incentives is always money well invested,” he said, “as long as the company culture is healthy enough to keep amazing people on board long-term. Highly compensated rock stars who defect to a healthier workplace or competitor prematurely actually cost you double or more,” Christopher cautioned.
“While you cannot afford unnecessary services, almost all startup entrepreneurs require legal advice,” said Matt Scott, owner of Termite Survey termite elimination service. “Whether it’s fundamental corporate documents or understanding liability problems, pay for good advice from the start so that the big bills of legal settlements are not stuck later on.”
And investments to avoid? Our entrepreneurs and experts cautioned against the following:
Large fixed costs
“The startup environment is a fragile one, and especially when you’re still proving out your offering, there’s a chance you may need to pivot – many of the big companies we see today went through significant pivots in their early life that got them here,” said Abir Syed, CPA and a former VP of finance at a well-funded startup who now runs UpCounting, a marketing firm for accountants. “Large fixed costs can suddenly become onerous if things change, so it can be worth it to pay a little bit more to retain flexibility,” Syed said.
Sure, you need workspace, but does it need to be outside of your home? If it does, look for the shortest-term lease on the smallest space that will work for you today. That will give you the flexibility to move if you suddenly need more space; you won’t be stuck in a long-term lease that hampers your growth.
Grandiose corporate parties or trips
Scott said that spending big money on fun trips “is not a sign of success – it is a sign of waste.”
Serial entrepreneur Nishank Khanna, CMO at Clarify Capital sums it up well when he advised, “Responsibly and thoughtfully using capital is imperative for an early stage startup, because poor money choices early on can cause irreparable damage and undermine the success and sustainability of the company long-term.”