"Stay lean!" is a mantra for many entrepreneurs. But it has its limits. At some point, growth requires investing in product development, marketing, or some other aspect of the business. With cash (and credit) in short supply, however, many company founders struggle to decide where, when, and how much to invest.
A trio of entrepreneurs from the Lincoln, Nebraska area talked about the challenge of spending at the "Power to the Small," a panel discussion sponsored by Windstream.
They suggested that three factors are particularly useful in making such decisions:
Focus On Revenues
Chris Davis, co-founder of Travefy, an online and mobile group travel planner, said that while staying lean is generally a good rule for most start-ups, it's possible to be too lean, and that frugality can actually impede growth.
"At one point, we set ourselves months behind because we didn't spend enough to get the right people," he said. "We knew what we needed to do: we needed to bring in three more people to elevate our web site to the standard of Facebook, which is what customers expect. But we hesitated on hiring those people."
Ideally, he says, an entrepreneur should make such decisions based on hard data rather than gut instinct. "If you know that adding another person will bring in X amount of additional revenue, it's a pretty straightforward proposition," he said. "But it's not always that easy. We might know that if we bring in people to add functionality to the website that will improve the user experience and please our customers, but we can't always predict how that will affect sales."
Trial and Error
Jennifer Rosenblatt has launched two businesses in Lincoln -- Argyle Octopus Press, a marketing firm, and MusicSpoke, a marketplace for musicians. With her first business, she didn't spend money until money came in—the growth was purely organic. However, she said a scalable company like MusicSpoke needed greater capital investment to move to the next stage sooner.
"Every business is different," she said. "Deciding where to spend can be a trial-and-error process."
Echoing Davis's desire for "hard data," she noted that many spending decisions can be tested. "If you're doing pay-per-click marketing, you can test it relatively cheaply by spending $5, $10 or $50. You see if you're reaching the people you want to reach and then expand from there."
She says her company measures "literally everything" -- even the traffic flow to their booth at trade shows -- in order to see if changes need to be made.
However, she adds that it sometimes makes sense to wait to spend. Three months after launching MusicSpoke, 16 composers and 100 music teachers had already signed up for the site. The quick growth validated the site's potential as a business but also caused concern that the first build wouldn't be able to handle that much traffic. She was told it would cost $80,000 to redesign the site from scratch to make it more scalable.
"One of my mentors told me not to spend the money at that point because we didn't know for sure which parts of the website worked and which didn't," Jennifer recalls. "He said, 'If you get to the point you have so many customers that the website can't keep up, that encourages people to invest in the business.' So try to get to the point where you have the problem of too many customers."
The End Game
Stephanie Jarrett, who founded Bulu Box, an ecommerce business that offers monthly subscriptions to health, nutrition, and weight loss products, said her spending decisions are always done with a very specific goal in mind -- getting her company acquired.
"Whenever we think about devoting resources to something, we work backwards and analyze, 'Who are the types of companies that might acquire us, and why would they acquire us?'" she said. "That is our filter, and it helps keep us from being distracted by opportunities that seem appealing but won't bring us to our final destination."