Every startup puts together a financial spreadsheet, and, invariably, I always find some line item or expected hiree that reminds me of the elevator/elevator shaft problem. An architect friend related to me his story why he fired his own brother-in-law. His brother in law was tasked to design and build and install an elevator shaft and an elevator. Then I asked what did he do wrong? His brother-in-law, he replied, built the shaft before putting in the elevator! It was so obvious that he couldn’t work with someone making such a dumb, costly mistake: it meant tearing part of the shaft to install the elevator.
How does this example apply to startups? Virtually every inexperienced entrepreneur puts together a spreadsheet to hire certain staff way prior to having any duties and responsibilities. Once, I knew a high-tech East Coast startup, whose founder decided to hire a general counsel full time. One major problem: outside of negotiating a lease and very minor transactions, the company had no products to sell and it would take over a year to get there. Full time in-house attorneys cost at least 6 digits. Besides that mistake and others, the startup burnt through $10 million in a year. The founder returned to academics.
Another startup hired a twitter expert for its company, costing about $70k a year. The problem: the website had been under development and would take over several months before the website had any chance of completion. Indeed, that employee remarked that she had nothing to do.
I deal with these issues quite often. Recently, someone wanted to hire or contract a salesperson. But the product requires regulatory acceptance and not until the government allows the sales for that product, there is no product to market. And another startup budgets a 5 person company with a full-time CFO from day 1. Yet, the meager activity of that firm does not merit a full-time CFO.
Why is this lopsided process costly? Money or any other resource, including time, that could go into marketing, product development, or capital raising is redirected to an unnecessary, untimely expense. The focus is to bring in revenues with the best margins possible. Instead of a full time CFO, the startup can hire a part-time CPA. Instead of a full-time lawyer, outsource to smaller law firms. Instead, I find that the focus for raising money is misdirected for the company, and the senior managers are decorating an office.
In effect, every startup must manage its costs, both capital and time, wisely. The startup must plan its strategy on a monthly basis and parse its capital and time efficiently. Large companies with thousands of employees can afford to be frivolus. Not startups. One Nobel Prize winner in economics, Coase, stipulated that a “firm” or company only needs to internalize its outside expenses, namely, law/accounting firms, production, etc., when it is cost effective to do so. Otherwise, you are building an elevator shaft before putting in the elevator.