February 24, 2010

Allocating Revenues vs Spending Money

I was reminded twice this month of just how different the mindsets of bootstrapping entrepreneurs are from investment backed ones.

The first reminder came when I read about a high profile company that went bankrupt earlier this month. I met the founder of this company about a year ago at a local meetup of web entrepreneurs. His advice to another entrepreneur was that he should focus on spending as much money as he could raise to grow his user base, and forget about making money. In his own words, "the minute you start making money, your valuation is based off of those revenues." As it turned out for this entrepreneur, his company focused on revenues too little, too late.

The second reminder came last week when Jamie Quint, a former Co-Founder of SnapTalent (Y Combinator Company), wrote about one of the lessons he learned after they shutdown in 2009. The quote below is from an email dialogue with an investor and a co-founder about spending money on cell phones.

Hey investor1, Wanted to ask you if you think its a sensible idea to spend some of our money on phone/email access as a business expense. For the sales folk in our team, having phone and email access is key, and for engineers being close to email on the move is also key. We're currently debating whether this should be a business or personal expense. We're thinking it should be a business expense - but wanted to get your thoughts before we do anything on this. Thanks, - founder1

Jamie Quint, Lesson Three - Spend Time on Things That Matter

If you clickthrough the link above and read the rest of the email dialogue, you can see analysis paralysis in action.

When you were starting out, did you ever deposit a large sum of money and not know how to use it?

How you answer that question largely depends on how much you start out with. Contrast the two examples above, with my experience.

We started Condesa with $2,000 which was a large sum of money for us at the time. We barely had enough money to build the foundation of our company. The first $1,000 went to build a server that we co-located in a friends rack at AT&T. The other $1,000 went to pay for the Nolo Law Book / California incorporation fees and our merchant account.

A few years later when PR Leap was getting traction, allocating our revenues was simple. When our revenues doubled month-to-month we upgraded our hardware instead of rewriting our codebase. That decision saved us a few months in development time, which allowed us to improve our product and grow our revenues.

It's much easier to allocate revenues than it is to spend money. Of course to have revenues you need a product people want to pay for, focus on building that instead of spending money.