Knocking Down Doors

Smart start-up lessons for smart start-up people

How to Spend Your Startup’s Initial Investment

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The easiest way to go out of business is to misspend the money you’ve saved or received to simply start your business. If you’ve got $50 in your pocket to buy new shoes, you’re not going to end up in a good place after you spend $48 on pizza and beer.

There are two major reasons that people fail to use their initial investment wisely. First, they have no idea what they need to make, so they spend their time and money building something no one wants or needs. The second is that people get caught up in the idea of being a Startup. They buy pool tables and kegerators and treadmill desks when they should be building something – anything, really.

startup investment

One of the keys to spending wisely is in treating the money you have – no matter where it came from – like it’s your money. Bootstrappers often talk about the way spending your own hard-earned cash makes you rethink the quality of every investment. No matter where you got the cash, though, you can adopt that mindset.

Let me propose the following breakdown of how to spend the money you’ve got, be it $1 million or $10,000.

  • Up to 20% on market research
  • At least 75% on building your minimum viable product
  • Whatever’s left over on the rest of the stuff that seems important at the time

Starting with market research (<20%)

If you’re making a product that no one cares about, you’re not going to sell much. Spending money and time on research is money and time saved later during development. I’ve said it before and I’ll repeat it here – your friends and family are not reliable sources of feedback.

There are three simple ways to get this done.

  1. Interview your potential buyers. Sit down with the people you think might be interested in your product and find out if they actual are. This is a great opportunity to get feedback on the features and pricing you have in mind.
    Adele Revella at the Buyer Persona Institute has some great tips on getting buyer personas right. She focuses on getting away from the “Mark, 75, loves golf” style of personas and diving into a more detailed analysis of how people make buying decisions.
  2. Survey a whole bunch of folks. If you don’t have the time, resources, or skill to interview folks, send out a survey. Keep in mind, though, surveys are hard to get right. A lot of the quality of the responses you get will depend on who you get to answer the survey. Do the work up front and, budget permitting, work with someone who’s done it before.
  3. Hit up that Facebook action. I got this one from Eric Roy at Hydroviv – elevator pitch, “The only water filter customized to your water quality.” He spent a few hundred dollars on Facebook advertising early on to figure out who was interested in the product he had designed. The beauty of Facebook is that it spits out tons of demographic information about the people clicking on your ad. Think you’re product is for CFOs? Get ready to be surprised when 25-year-old accountants start clicking.

Founders need to get outside of their bubbles to get real feedback. I love face-to-face interviews, I’m happy to see surveys, and, at the very least, I want some information from a Facebook campaign.

Building your minimum viable product (>75%)

This is fudging it a bit, as the resources required for building your MVP can include office space, employees, and technology. The fudge is intentional – and delicious – though.

When you’re thinking about spending money, I want you to be looking a purchase in the face and ask yourself, “Does this get me closer to a completed first draft of my business?” If it does, then it falls in the MVP category. If it supports your culture or the future financial structure of your business or is just a box of ping pong balls, it’s not core to the MVP.

This is the biggest chunk of your cash because it’s the most important thing you’re going to be doing and the thing people screw up most often. Hacker Noon defines a minimum viable product as being “all about solving the problem by the most basic solution.”

That means the product is going to change, but that it does the job.

If you’ve ever written something, you know that getting the ideas out of your head and onto the page can be the most difficult part of the process. You have to organize, plan, and execute the great idea that’s been living a perfect life in your head.

Ideas are always lovely when they’re stuck up in your brainbox – putting them out in the real world highlights all their ugly flaws.

There are plenty of ways to keep expenses down at this phase of the game.

  • Use contract employee. Hiring someone full- or part-time can be rewarding, but it can also constrain your budget in unforeseen ways. Contract employees can help you through the first few hurdles and get the thing done.
  • Find free software to support you. You need accounting software, might want a CRM, and could probably use some project management software to get the MVP done. Get the free stuff – as linked above.
  • Culture is for closers. I love my office culture and Capterra simply wouldn’t be the business that it is without that culture. When it’s you and three guys remoting in from Birmingham, culture can take a backseat. Please, please, please don’t celebrate your success before it happens or you’re just going to watch it fade away.
  • Do more with less. If you’re building an app, you don’t need your MVP to be designed on a custom Alienware box. If you’re making a Bluetooth speaker, it doesn’t need to be made of carbon fiber. You can iterate on components after you know that the thing you’re building works. Even if you’re starting a consulting firm, you can find ways to save cash. Print at FedEx, get the middle-grade business cards, or meet people at Starbucks instead of a place you pay rent on solely to host one meeting a week.

If you can keep your eye on the product goal, you can start saving money immediately. Every dollar you save at this point becomes a dollar you can spend making the product perfect later on.

Repeating the research

Ha ha – gotcha!

Before we get to that sweet, sweet kegerator cash, you’ve got to reassess the market. Now that you’ve got an MVP that people can work with and break, you’ve got a great opportunity to expand your addressable market.

My man Tomasz Tunguz says that, due to the natural limitations of a first draft, you “will be able to address only 5 to 10% of the addressable market with that minimum viable product.” As your product evolves, it may reach into new markets. That means you may want to add new features, reassess pricing, or redefine your ideal test cases.

The other stuff (Couch-Cushion-Change%)

Feeling like you’re starting something up is important. It’s easy to knock the secondary benefits of being a founder, but they matter.

Use the cash that you’ve got leftover to join entrepreneurial networks. Make your living room into a slightly nicer place to work. Get a big monitor or a new laptop or a tablet. Buy the business cards that are so thick no one can fit them in their pockets.

People on diets have to set realistic boundaries or else they crash – being a founder is no different. Set clear expense boundaries for yourself, but find ways to enjoy life.

Follow along

We’ll be detailing more of the founder’s journey this year, covering everything from basic software stacks to increasing your productivity. If you’d like to join us, check out Capterra’s Knocking Down Doors blog.

If you’ve got an interesting startup story, feel free to drop a line in the comments or shoot me an email. Good luck.

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About the Author

Andrew Marder

Andrew Marder is a writer for Capterra. His background is in retail management, banking, and financial writing. When he’s not working, Andrew enjoys spending time with his son and playing board games of all stripes.

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