Why cash isn’t king in startups

cash.jpgThe truism in the startup world is that Cash is king. And it is true that without cash a business will eventually go out of business, as it won’t be able to compensate its staff and pay its bills.

There’s a standard question I ask a founder of a brand new venture: “What is the major asset of your company?” This usually promotes some head scratching, followed by answers posed as questions like “my idea?,” “my connections?”, my product?.  But the answer, which no one has yet given me, is none of the above: it’s you. Your expertise, your experience, your energy, your work ethic, your vision for the venture. The startup will go nowhere without its founder.

Many founders go months, or in one of my  favorite companies, years, without taking a salary from their venture. A determined, brilliant person can get a lot done with little or no cash; I’d take that person over someone with a million dollars in cash but zero creativity, a poor work ethic, and low energy.

But if the major asset of your startup is you, what does that imply? What is your major asset? Your time. I recently had a meeting in which the two founders had spent six months and a lot T & E money trying to sell to a large company, without success. As a founder you cannot look at spending your time like you could spend money. It’s always possible to get more money, but no one can work more 24 hours a day, 7 days a week. In actually, while everyone’s limit varies, most founders work about 70 hours a week.

The big challenge in a startup is how do you allocate scarce resources? How how should a founder allocate their resource of time? I have come up with a term I use to answer this question: ROTI – Return on Time Invested. If anyone had taught these two founders how to sell they could have asked their prospect a series of questions before spending their literally precious time flying to Europe to meet with him. Asking questions of the prospect in the sales process is known as qualifying the customer. That means determining if your prospect – the person you hope to turn into a paying customer – has the ability, authority, and the inclination to purchase, and that the purchase meets your minimum amount to make it worth handling.

There is a secondary benefit to qualifying the customer, not only do you save time, you are less likely to pay an opportunity cost. Opportunity cost represents the benefits a founder misses out on when choosing one alternative over another.  The time you wasted trying to sell to an unqualified prospect could have been invested in turning a qualified prospect into a sale; not just generating current revenue, but also the potential to sell other products in the future to that customer.

The key question for founders thus becomes How do you manage your time? There are two vectors to time management: priority and alignment. Priority means you do first what is important, not what seems urgent. Secondly, what you do with your time needs to aligned or be in the correct relative position amongst your tasks. Time investment is like any other resource; tasks need to be arranged in order of their predicted return. For example, you have one customer where you have a 10% chance of making a $5,000 sale versus another customer where you have a 5% chance of making $100,000 sale. In the first instance you have a probabilistic  return of $500 (10% of $5,000). In the second instance you have a probabilistic return of $5000 (5% of $100,000). It’s clear that you should prioritize the latter sales opportunity and you shouldn’t spend more than $5,000, and preferably substantially less,  pursuing this potential customer. Sales and marketing lend themselves to this quantitative approach of how to invest your time. What about product development? QA (Quality Assurance)  had been one of the departments reporting to me in several startups. The QA team had to spend some of their limited  time classifying bugs (showstopper – must be fixed; UX confusion – should be fixed; and cosmetic or rarely occurring – might be fixed if the schedule permits. (This ranking gets reviewed by product and engineering managers, with special attention to show-stopper bugs, like losing data or crashing the operating system.)

When your company gets larger you need have a managers in place who can train their staff to manage their time by setting priorities and allocating their time proportionately based on the expected ROTI, such as increasing sales, generating fewer tech support calls, or developing more leads for the sales team.

Raising investment capital is very time consuming and frustrating for a founder who also has to build a product, recruit staff, manage their investors, and dozen other things. But it needs to be treated like any other task: what is the return on time invested? Is it worth the time to meeting with a VC who seems interested, but whose fund has never invested in  the market and customer you target? Couldn’t that time be better invested finding a VC with a portfolio of companies in your market? Qualify your investors!

Finally, stop  thinking of what you do as a founder as spending time doing X. No. You are investing time doing X because X has a high expected return or benefit. That could be timing the release of  a product (in time for an important trade show). What is the expected benefit of appearing exhibiting at a trade show? How many leads generated versus a direct mail campaign? But not every action can have a near term measurable benefit. Meeting potential channel partners at a trade show may be hard to quantify. But before you start investing time in finding a potential partner you need to determine the financial costs and  benefits, known as a cost/benefit analysis.

Do watch your cash! Unless they are independently wealthy, founders only have so much elapsed time they can invest in their business without drawing a salary, even a subsistence level one. Prioritize your investment in tasks or projects, just as you prioritize your spending – based upon an expected return. That way you can stretch the dollar and make running out of cash less likely.

 

Author: Mentorphile

Mentor, coach, and advisor to entrepreneurs, small businesses, and non-profit organizations. General manager with significant experience in both for-profit and non-profit organizations. Focus on media and information. On founding team of four venture-backed companies. Currently Chairman of Popsleuth, Inc., maker of the Endorfyn app for keeping fans updated on new stuff from their favorite artists.

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