Wasting Money

All companies waste money.  It’s a question of when, how much, and whose.

In addition to projects which didn’t work out from a market acceptance or technical feasibility, all companies make bad hires, spend money on marketing that doesn’t work, go down a wrong technical path.

It’s ok.  As long as you understand sunk costs and learn from your mistakes it’s why you kick BigCo’s ass.  BigCo execs are so worried about making a mistake and wasting money that they constantly have meetings with 17 people in a room desperately trying not to make a decision because if it’s wrong and they waste money somebody will lose their job.  I love the irony.

But you have to understand when you want to take the risk and how much it’s going to cost.  That varies on the stage of your company, and what you see, not what you think, or worse hope the market is doing.

Early on you want to take many risks and not have each one cost you much money.  That way you can keep iterating and see what the market says.

If you are in hyper-growth and you see the market is exploding the number of risks you take goes down but you are willing to spend a ton of money to stay ahead of the curve.   I.e. making sure you have a large enough sales staff and marketing budget to handle demand.   You know you are going to have some bad hires, over-hire, and you waste money on marketing and PR but those big costs are worth it to own the market.

The hardest thing to do in later stage companies is take little risks and figure out when it’s time to make the huge jump to obsolete your current product before somebody else does.

Which brings us to the last part: Whose money?  If the money is coming out of profits or your own pocket that’s easy to understand.   Where people make a mistake is that when they think it’s coming out of somebody else’s pocket.  You may think you don’t care about wasting money because it’s a VC’s money.

I guarantee it is the most expensive money you can waste by a factor of ten.  Exactly what the VC is looking to get as their return.  Don’t misread me.  I am not bashing VC’s, just the opposite.  I am pointing out that if you, the entrepreneur, think you are just wasting the VC’s money and there are no ramifications, you have nobody to blame but yourself, when the money runs out, you haven’t made the progress you promised, you’re fired or demoted, and preferences and anti-dilution clauses kick in to destroy your stake.  Don’t cry.  You made the choice of when, how much, and whose money to waste.

  • http://www.aaronklein.com/ Aaron Klein

    So true. Critical to waste money in a controlled and strategic way. I’m struggling with this now – and the irony is, we’re building an amazing tool to revolutionize how we make risk/reward decisions! :)