How Do Startups Buy Time?

Updated: March 28, 2011

In a startup, success or failure usually boils down to staying alive. There will be good and bad months, but staying cash positive lets you hang on and keep moving. "Napoleon said that an army marches on its stomach" AdGrok says, but "a startup marches on its bank account." In other words, as your accounting professor no doubt told you: cash is king. To that end, we've listed some practical ways that smart startups can buy time with limited resources:

Building The MEVO First

In the 1990's, the standard startup model was:spending whatever it took to build your entire idea now. If your big idea was a new membership site, then absolutely all of it had to get built up-front. Then - and only then - could you start getting users and making money. For obvious reasons, this soon proved impractical. Startups went bankrupt after their first failed attempt at capturing the market. Today, a smarter model prevails. In his book The Personal MBA, Josh Kaufman advocates building the Minimum Economically Viable Offer (or MEVO) first. Rather than draining your bank account to create some huge, monolithic infrastructure, you instead "provide the smallest number of benefits necessary to make a sale." The smallest, easiest, and cheapest offer that will actually persuade a real person to express interest or buy. Then, on that basis, you can build out the product (if it looks promising) or go back to the drawing board.

Side Consulting

Believing in your startup's mission goes a long way, but there's no substitute for cash. If the company can't afford to pay out salaries yet, doing consulting work on the side can bridge the gap. Everyone's bills get paid and no one daydreams about finding regular jobs when tough months come. The trick here is not letting side work overshadow the startup. Without firm dedication to the mission, it's easy to get comfortable with consulting and just do that instead. Don't fall into this trap! Remember: side income is meant to tide you over while you launch the business, not replace the business.

Ramen Profitability

Nothing allows startups to buy time like self-sufficiency. When a startup can pay out at least a meager salary (enough to cover the founder's basic living expenses) it is said to be "Ramen profitable" - and it is now much more resilient than before. Nor is it very difficult to see why. You are probably familiar with Abraham Maslow's famous Hierarchy of Needs. This concept explains that basic needs like food, water and shelter are essential to our happiness and take precedence over optional goals like starting a company. When these basic needs are jeopardized, morale tumbles. You might be able to press on for a while, but few can focus on the future when survival is at stake. Hence why it helps to be Ramen profitable. Knowing your bills are paid frees you to focus on the long-term instead of constantly fretting over next month's obligations.

Low Fixed Costs

Does your startup having an expensive office with lavish furniture, brand new computers and gourmet food? If so, you may be setting yourself up for disaster. This was another late 90's startup habit: spending thousands of dollars to "look the part" rather than actually building the business or making sales. It feels exciting, but all you're actually doing is making the company less able to withstand financial problems. Smart, resilient startups know the importance of having low fixed costs. If the rent on an office building would be impossible to pay in a bad month, they pass on it. In fact, they subject every fixed expense to the "could we pay this in a horrible month" test. Startups that die ask only "can we afford this right now and if income stays exactly the same" Not smart.

Corporate Credit

Financial flexibility isn't a big concern when you have $100 million in venture capital. For bootstrapped companies, though, it's everything. Being able to defer an $18,000 advertising bill by 30 days can mean the difference between survival and bankruptcy. This type of financial maneuverability is exactly what corporate credit provides for you. Corporate credit is ideal when your company's receivables arrive on a later schedule than payables. For example, if your rent is due every 30 days but your customers pay every 60 days, you just carry the balance and the problem goes away (instead of rearing its head month after month.)

Willingness To Adapt

Startups that become long-term businesses master the art of adaptation. They don't cling to their vision and insulate themselves from criticism. Just the opposite - they pay close attention to what the market is telling them (user feedback, competing products, industry trends, etc.) and position themselves accordingly. If that means ditching a feature you're passionate about (but no one else wants) then so be it. The goal is satisfying customers first and yourself second. Stubborn startups ignore this, putting all their time and resources behind the original plan in hopes of forcing it to work. "If nobody wanted your app last month, we should spend twice as much promoting it this month." Needless to say, this is nothing more than a painful shortcut to bankruptcy. Don't delude yourself with wishful thinking - fail fast and fail cheap so you have money left to start over.

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