Key points:
- Make sure spending is directly relevant to the short-term success of the startup
- A lot of crucial setting-up work takes time and money
- Avoid paying for things such as office space until the business is bringing in money and you can afford it
- Always focus on the business’s critical competency
If anyone knows about setting up a new business, it’s former Dragons’ Den star Doug Richard. The entrepreneur – who set up the School for Startups in 2008 – has more than 20 years’ experience in developing and leading technology and software ventures.
Doug always stresses to budding entrepreneurs the importance of keeping startup costs down. We spoke to him to find out the common areas entrepreneurs waste money and what they can do to make sure every penny is spent wisely.
Why do so many startups waste money?
Most people who start a business don’t know how business works! And even experienced businesspeople waste money when they don’t have to. The most important thing to remember is that spending in the early stages of a business has to be directly relevant to its short-term success.
For example, many people grossly underestimate the cost of marketing – going from being invisible to visible. Sorting out something like distribution might sound simple, but that takes weeks – maybe months – of meetings and negotiations to find the right partner. The time and money costs of getting any kind of business relationship going are, more often than not, underestimated.
How can they sustain themselves during that period?
Someone in their 30s will have usually put money aside for that period between starting and making money. If they’re young, though, they tend to just live cheaply.
What kind of waste usually occurs in a startup?
People tend to over-purchase on a variety of things not directly related to the success of the business. Spending money on anything that doesn’t directly turn into some kind of sale, purchase order or relationship is a mistake. Take office space, for example. The smart thing to do is to work from home for as long as possible and stay brutally cheap.
Running a startup can be a humbling experience. You don’t have any evidence to show that you’re a success, so people can be tempted into spending money to prove to the outside world that they are.
What should entrepreneurs be more focused on?
The critical competency of their business – and this is the key advantage you have over your competitors. For a software product, for example, it’s about getting it done quickly and making sure you have a great product. Money that goes into things not directly related to the startup’s critical competency is likely to be wasted.
Doug runs the School for Startups, www.schoolforstartups.co.uk
