How to Spend Your Startup Money
Aman, Alberto, and I jumped on the video call; Cameron dialed in moments later. Our snag and why we three reached out to Cameron: should we invest a $100,000 and build the app to attract customers and investors to our fitness startup? We had a web-based proof of concept that we cobbled together out of a sql database and some web forms. It connected to an OptaPlanner rules engine on our Amazon server. It proved the idea, but it lacked polish and had many steps to go before being commercially viable. A spend of $100k might make us commercially viable. Cameron came to advise us whether to spend the money or not. While the three of us had been playing startup for the past eighteen months, Cameron was living it. He quit his job in Silicon Valley, sold his Tesla, and listed his house in Tiberon (north side of the bay) to come back to Toronto to be CTO of a data monetization company. I interned with him during my MBA as part of the Creative Destruction Lab course. We also used to play Street Fighter II Turbo together on my Super Nintendo.
We walked Cameron through our current hurdle. Without something; we have nothing, therefore we should get something right? Cameron listened to our biz spiel from Aman, our CEO and sales leader. When Aman finished, Cameron’s questions came in rapid succession.
“What is your cost of acquisition? What are your largest assumptions? What are your riskiest assumptions? What is your customer pipeline? What is your product-market fit? How many users have you run through your alpha release? What was the feedback? How many VCs have you talked to? What was their feedback? Do you have any true believers yet? What do your customers want? What do they believe their pain points are? What do believe their pain points are?”
We gave it a good team go to answer the questions competently, but so many questions we didn’t have competent answers for. We had been at it for almost two years, had done three separate courses on entrepreneurship in our MBA at Rotman, and it still felt like we were being schooled. In Zack Snyder’s 300, Gerard Butler’s Spartan king asks the men who have come to join the Spartans ‘what is your profession?’ The men asked answered with ‘I’m a potter,’ ‘I’m a sculptor,’ and last said ‘ I’m a blacksmith.’ The Spartans’ profession was ‘WOOOO HAAAAAAAA!’
“Guys, be extremely greedy with how you spend money. The days of ‘if you build it they will come’ are long gone. That is dot-com-bubble thinking. If you build it will anyone care? You don’t know because you haven’t asked.” Two years and we still hadn’t left the building; we just wandered the atrium and thought we had gone outside. Cameron left us with three pages of notes across the entirety of our business to analyze, review, and formulate into a cohesive action plan. We had to do something different if this thing was to keep going.
The Cameron meeting led to a month of planning and revision, and a clear escape plan that saved us somewhere close to $250k including development costs, user acquisition, and marketing. We avoided these very high risks by being greedy and not listening to the voice telling us to build it and hope for the best.
Do Not Spend Money On
Business cards: I personally disagree with business cards. Some people like them. I don’t think they’re necessary. People that love you will find you. People you love, will have business cards or an email address. I have a drawer full of business cards, mostly my own, but a fair amount from those I met on this journeyg. I am told this is how it goes and that is the cost of respectability.
Lawyers: if you think you have a great idea, you don’t need a lawyer to defend it, you need to build something tangible. Until the first dollar starts rolling in or the first asset is on the shelf, you have nothing except big dreams of big green. Trust your partners, for a little while at least. You may be lucky and things will move quickly, or you may find yourself in a grind.
A website: build it in powerpoint, in excel, or on a napkin first. When it’s working and functional and has something to sell, pay for getting the website up, and getting it marketed to the right audience. Don’t worry about securing the domain of that awesome business name. The name may change. In our case, Spotfit was very similar to Spotify and we probably would have changed it eventually. Worse, our domain of .io didn’t apply after our pivot when we left IoT to focus on AI. Aziz Ansari has this great line about comedians he knew getting head shots done when they should have been writing material. Write the material; don’t worry about the head shots. Worry about the material.
Developers: testing an idea can be done with a pad of paper and a pen. Proving an idea can be done with cardboard. Test and question every assumption, especially how much it will cost, how much it should cost, and will it work. Developers will not fix the fundamental problems in the business plan; worse they may make decisions that exacerbate the problem. Solve it first in a lo-fi prototype, then when it comes time to upscale, developers can follow along with how it should work instead of trying to fill in gaps with how they think it should work. It’s your business and your problem to solve.
Do Spend Money On
Spend your money on tests that help validate the idea. We built an IoT implementation before our pivot to focus on software. We spent way too much to test the IoT idea, but we needed some way of testing it. There were cheaper options, but in a perverse way we needed to spend to money to learn that lesson. We ignored our customers, our user journey, and we made a whole bunch of assumptions. We did validate that sensors could capture the data we wanted, but it became abundantly clear that data capture did not constitute our business objective. Sometimes motion does not equal progress.
Every dollar you spend should equate to another point of knowledge on your journey. Lawyers and business cards and websites give a veneer of a business, but they are not the business. The business is finding out what customers want, what you can do to get the wants met, and what obstacles need to be overcome to get there. A startup in its early stage should be focusing on identifying assumptions, assessing risk, and validating a course of action. Money should be deployed for those reasons only. Everything else is fluff and window dressing. After all the research is done and all the groundwork is laid, then it might be time to buy some business cards, get a website up, or hire a lawyer to create some articles of incorporation. The craftsman that restored my log home did not have a website, but he definitely had a viable business. Get to the stage where you have something to sell before applying the veneer of salability.
The Last Stop
We spent months cleaning up our act, but the same question remained. How do we move forward without a product? We had to build something to either raise money or build something, get customers and get money from them. I lined up another call with another entrepreneur/mentor. He connected me with a mobile architect in Vancouver. And Aman, Alberto, and I questioned our assumptions and was greedy.
When I see Fitbit offering mood and recommendations on effort based on a user’s mental state, I feel a tinge of bittersweet pride. My idea had legs enough to be adopted by the foremost leader in the health tracking space. I regret not being able to prove it with something tangible. We spoke with the mobile architect and, with him taking equity, we reduced our cost from $100,000 to $35,000, but all the other problems remained. Users cost $30-$50. Margins were about $10 per user. We didn’t have a Tinder or Bumble. We didn’t have a first mover advantage, an installed user base, a holistic customer experience, or a 10x multiplier. We had another fitness app in a crowded fitness app space. Split four ways, our eventual return in two or three years would be lower than our current salaries. The most important decision when spending money on a business is knowing when to quit.
I remember meeting my entrepreneurship profs in his office and naively asking, “people bounce back though right? They try it and move on if it doesn’t work?”
He looked at me gravely and said “God no. They lose all their money and all their family’s money and all their friend’s money and they all end up destitute. I know at least three people in that boat, and two that I personally feel are headed that way. No, the risks are very real and people don’t know when to quit and, worse, refuse to quit. They get divorced; they don’t see their kids; they lose friends they’ve had for years; they don’t speak to family because of the anger or the shame. It’s not pretty and it shouldn’t be taken lightly.”
“Oh” I said.
