One of the main issues facing the entrepreneurial talent of the UK looking to start a new venture is finance. Finance has the power to make or break a fledgling business.
In order to find out how other businesses owners have tackled this issue, we approached a variety of successful tech start-ups who have shared their first had experience of dealing with finance as well as the lessons they have learned; John Peebles, CEO of software developer Administrate (JP), Avin Rabheru, CEO of online professional home cleaning service Housekeep (AR) and Andrew Thelfall, managing director of web-based CRM company Malinko (AT).
Did you experience any financial difficulties when you first set up the business and how did you overcome them?
JP: One of the foundational characteristics of a start-up is that it is born into financial difficulty. Some say a start-up is an organisation in search of a profitable business model, and I like to think that even well-funded start-ups are faced with the financial difficulty of trying to make sure they don’t become one of the 95 per cent of tech start-ups that fail within 18 months.
We were no exception to that. One of the major difficulties every start-up has is around pricing – how do you price your product? How do you make sure customers are getting enough value and you’re receiving enough money to keep the lights on? What we’ve done to overcome that struggle is we spent a lot of time making sure that our pricing was keyed to how our customers became successful. If they were successful (made more money), we would be successful (make more money). That was a key turning point for us and meant we had almost no objections around price and ultimately made more money.
AR: Starting a business with your own cash is hard work, but when it’s from your own pocket, it pushes you to think carefully about every penny. We thought smart about where we wanted to spend our money and what to invest in, negotiating the most attractive terms for each deal. Entering the home cleaning industry, which has historically run on cash payments, meant that we needed to simplify the payment process for the customer. By using a third party secure payment system, Housekeep bills customers on the day of their clean to be sure we are never chasing unpaid invoices.
AT: At the start of the business we relied on bootstrapping. We were working with a few key clients who we provided bespoke development work for, but during this time we weren’t paying ourselves much of a salary. Our priority was to keep the business afloat by retaining our customers. Rather than having a clear idea of what we wanted the business to become, we didn’t know what our product was or who we should be marketing to. At this point it was a priority to grow both the business and our client base.
What is the most important financial lesson have you learned so far?
JP: One of the most important things you can do for any company is create and reinforce a culture of frugality. Frugality doesn’t mean you have to be cheap, but it means directing your resources in a careful, thoughtful manner where they’ll do the most to further your goals. We spend money on things that many far richer companies don’t; for example, we insist on buying nice keyboards and large high quality monitors for our employees. We don’t spend money on really nice offices. We spend money on employee compensation, we don’t buy lots of decoration or stay in nice hotels for a short business trip. The bottom line is we ask employees to treat company money (and our investors money) as if it were their own. This has meant we spend far less that comparable-sized companies, can react to unforeseen expenses without blowing our budget, and has translated into a direct competitive advantage.
AR: When starting your own business, it is all about getting the details right. Think about the small things you can do, like checking that your bank balance is collecting interest and that you’re using technology to reduce operational cost. The finer details will make a noticeable impact upon your return.
AT: When the business started to grow it wasn’t a Field of Dreams scenario where ‘if you build it, they will come’, we found that in order to expand we needed to sell the product before we created it. This required a balancing act of not only finding clients, but also being responsive when we made a sale. We did a lot of networking at that time in order to discover the needs of our customers, and how our product would benefit them. We based our products around creating a solution to the problems our potential customers were facing.
What financial advice do you have for new start-ups?
JP: Be frugal. Hope for the best, but plan for the worst. Take a good long look at your pricing strategy and make sure you’re aligned with value creation for your customers. Spend a lot of time on your budget and have a real budget process to make sure you’re not leaving anything out. Invest in solid accountants. Always outsource your payroll processing to avoid mistakes. Always make sure you’ve got solid tax advice. Spend any extra money on your team in the form of salary or extra compensation. Make sure you align your sales team’s goals and compensation with the company’s performance. Lastly, worry about making your customers successful, keeping your employees happy, and the money will come.
AR: Make sure you have a profitable business model from the get go, that way you know your service will always deliver. If you can make money delivering the service with a small amount of cash for a small amount of customers, it proves you have something great. This way, you can scale the business to its full potential, rather than worrying about a business model.
AT: For financial control, know your cash position and understand the components of your burn. To develop the business you’ll obviously need to spend money, so think carefully about the unit economics around your business and the investment required to conduct the smallest meaningful test that validates your hypothesis.
We hope that these experiences and insights have provided you with the tools you need to combat the financial issues that present themselves when you start your new business venture.
Nigel Breddy is managing director of Databax.