Rule number one: keep your money in the pocket
One of the most important tips I find myself repeating to startups and young entrepreneurs is: always keep your money in your pocket. Don’t spend it, don’t commit to any expenses, and never buy anything that does not create more income than it costs.
As a young entrepreneur—whether funded or not—you will receive countless suggestions and offers for help: consultants, mentors, advisers, assistants, directors, and of course, incubators, accelerators, business clubs, events, conferences, and so on. My advice is to carefully consider what you are paying for, even if you have money in your bank account or have just received funding. This money can disappear in a matter of weeks. I have seen entrepreneurs lose their businesses because they missed this simple but crucial point: your task is to make your business earn a profit rather than just spending money.
About two months ago, I met a super-smart entrepreneur in Sydney’s CBD, in a high-rise building near Circular Quay, one of the most expensive real estate locations in the world. The guy, a PhD in mathematics, invited me to meet in his office. When I entered, we walked to the boardroom through an empty office space. “Yes,” he explained, “we had to cut most of our employees once we spent all our $5M investment. And this office? Well, the landlord insisted on a five-year lease, and the CMO insisted we have an office in the CBD. So here we are, with two more years of a $7,500/month lease—but no employees to use this space.”
I’m not a math PhD, but I know that $7,500 multiplied by 12 months and then by five years is $450,000—almost 10% of his company’s funding. That’s a lot for an unused office! Furniture, computers, and renovation must have cost another $100,000. No wonder they managed to burn through $5M in two years and ran out of runway without a proper product.
Since then, my friend and his co-founder have been doing coding and marketing themselves and have managed to launch their product and start earning.
Lesson Learned
My recommendation to any entrepreneur is to be very careful with any type of expenditure:
- Prefer a Lean Operation Over a Fat One
- Avoid Show-off Expenditures: Fancy offices and equipment, even if you are funded.
- Look for Programs and Events That Pay You: Grants or opportunities, not those designed to take your money.
- Ensure Paid Events or Activities Are Worthwhile: They should be niche events for your target market, capable of producing clients and income rather than simply offering networking opportunities with fancy people.
- Avoid External APIs You Can Develop Yourself: Such as registration APIs, mailing APIs, login APIs, and caching services. Developing these in-house can be cheaper, increase your tech stability, and add to your intellectual property.
Good luck!
Eran
