According to Inc., the single most preventable cause of failure among startups and small businesses is a lack of capital. However, what many don’t realize is that a lack of capital doesn’t always directly translate to underfunding in a startup’s earliest stages. Increasingly often, startups are failing after they’ve successfully raised funds due to wasteful spending. By understanding the current challenges faced by startups—including the struggle to strike a balance between spending and reinvesting—founders can make the right decisions for sustainable growth and long-term success.
Smart Investing or Frivolous Spending?
One of the biggest challenges today’s business founders face is attracting the right talent. Startups are in an especially difficult spot when they must compete with larger and more established companies to draw in new employees; these larger companies often have the resources to outfit their company offices with trendy furniture, catered lunches, and other costly perks that a startup simply doesn’t. In an effort to compete with these companies, some founders will utilize startup funds to purchase everything from ping pong tables for the office break room to expensive office equipment. Some will even forego practical, affordable office spaces in favor of those with lavish views or a hip location.
And while it’s true that, to at least some degree, this additional spending may attract a larger pool of job candidates, it’s simply not practical for most startups to be spending their capital this way. And it’s certainly not a viable long-term option. Consider, for example, a startup called GitHub that spent a substantial chunk of its $100 million investment on renovating their office to replicate the White House Oval Office. While what’s considered a smart investment may vary from one company to the next, there are many ways in which the average startup is misappropriating the funds it worked so hard to raise under the false pretense of attracting more potential employees.
Common Sources of Wasteful Spending for Startups
Of course, not every startup is wasting its money on creating replicas of the Oval Office. Most wasteful spending by startup founders falls into other categories.
Any founder wants nothing more than to see his or her business grow and succeed, but jumping the gun by hiring more employees than needed can be a recipe for disaster. Even having just one or two more employees than is truly needed can quickly drain funds and create a financial nightmare, so it’s better to start with a smaller group of workers and add more as it becomes absolutely necessary. Another cost-saving option for those in-between situations would be to hire a freelancer or independent contractor on a part-time basis.
Having the latest and greatest in office technology is always a plus, but for many startups, it’s simply not a practical allocation of capital. Founders should take the time to research the minimum equipment that will be needed to get the business up-and-running and then purchase it (or even rent it) for a reasonable cost. As the business grows and scales, more advanced equipment can always be purchased as funds allow.
Catered lunches and other employee perks are wonderful to offer, but for a startup, they’re generally not a wise decision. In reality, employees who want to get involved with a startup aren’t doing so for the perks; they’re doing it because they believe wholeheartedly in what the business has to offer and its goals for the future. In fact, founders should be extremely wary of drawing in talent with expensive perks, especially considering there will almost always be a larger competitor with more money to throw around for even bigger and better perks. Founder are better served in onboarding talent that is committed to the company’s mission and who will be there for the long haul.
Striking a Balance: What Founders Need to Know
The point here isn’t to convince founders that they should never spend more than the bare minimum. Every company’s needs are different, and there will likely be situations where a little extra spending can be justified as a smart investment. The key is to avoid getting caught up in the seemingly endless race to attract talent with “cool” perks in the earliest and most vital stages of growth. Remember: there will be plenty of opportunities to spoil your hard-working talent when your company scales. In the meantime, spending money on marketing efforts and other wise investments is best.