Late in my corporate career I was president of Sterling’s world-wide professional services company and needed advice on growth strategies. I was seeking business advice from one of the key management staff at Sterling Software, Don Thompson. He was one of the most brilliant business advisors I ever met. One day Thompson said to me, “People and their direct salary costs are two thirds of your expense base.” A quick calculation proved he was right.
People are not only two thirds of your expense base, but people drive all others expenses. For every person you hire, you need more office space, administration, and management. People are the key to success but they also burn lots of cash. Here are three strategies to build your business and conserve cash.
Hire Fewer But Hire Great
People are the quickest way to grow a business and the greatest expense. In a startup, it is critical everyone on the payroll is doing all they can to get the startup to profitability.
In 1981, I heard Charles Wang speak on the early stages of his startup company, Computer Associates. Wang was a technical founder. He said, “The optimal size of a software development team is five people. Every person added after that reduces productivity.” This is still true today. It is all about efficient communication.
This also applies to startups. There is a lot of learning which goes on in the early stages of a startup. You must learn about your market, sales channels, product, delivery, administration and people. This is the process of building institutional knowledge which moves you from an idea to a company. The process takes time and time is money. Fewer people during this early learning phase demonstrates respect for the learning process and expense control wisdom.
Trade Equity For Salary
Equity is the startups’ currency. In the early stages, key people demand more equity. Big contributors are always expensive. You can reduce this expense by trading part of your equity in the business in exchange for them agreeing to a reduced starting salary. In effect, you are trading away some of your personal long-term gains from equity appreciation for the increased chance at succeeding in the short-term.
In my first startup the founder held 100% of the equity. Seven months after I joined the business, we moved from Mobile, Alabama to Atlanta, Georgia. After we moved, our lender pulled the plug on our loans. The founder couldn’t find a lender in Atlanta and our survival prospects were looking grim. So he offered to sell me 40% of the business. He needed me, my skills and support. In short, he needed a long-term committed partner.
Together we landed a new lender, grew the business and later sold to a public company. By offering me equity, he kept me in the startup at a nominal salary. This allowed us to survive on lower sales revenue. As the sales pipeline increased so did our expenses and this is how we grew the business.
There is no universal rule on how much equity to trade in exchange for the ‘right partner.’ My practice is simply this: the earlier in the startup’s life, the scarcer the cash, the greater the equity needed to attract the high powered contributor.
Spend On Revenue Generators
In the early stages spend money on the people that make you money versus the people who make you efficient.
My partner was singularly focused on revenue. My job was to build the product and install and support it. His job was to sell the product. It was a great partnership.
When our expense base grew it was always on the revenue production side first. We spent money on lead generation and sales people. We slowly added programmers and support personnel, and were really slow to add administration. The order of priorities was sales, product then administration.
People are your biggest continuing expense. They are fully two thirds of your expense base. They are an easy expense to add and a difficult expense to maintain. They are even a more difficult expense to eliminate. Go slow on adding people when coming out of the blocks. You will never regret it.