Accidental Entrepreneur: Important Financial Hacks While Building Startups
Welcome to my 32nd weekly article as this week is called “Important Financial Hacks While Building Startups”.
In this article I will try to provide some insight into how we, my cofounders and myself, managed the financial aspect of building companies and played the long game for success.
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My goal is to be able empower folks to go after their goals and reach their full potential!
“இயற்றலும் ஈட்டலுங் காத்தலும் காத்த
வகுத்தலும் வல்ல தரசு”. — திருக்குறள் (385)
“Producing, saving, protecting, regulating and
Equitably sharing is the way to powerful governance.” — Thirukkural (385)
Now I have set the foundation for financially organizing one’s knowledge and applying them for success. People may ponder that these are taught at schools and there are so many articles and tutorials available on the internet, yet nine in ten startups fail. Most of the failures are due to the financial planning and running out of cash to take it to market. In this article I will try to provide some insight into how we, my co-founders and myself, managed the financial aspect of building companies and played the long game for success.
I am categorizing these learnings into three main categories, Internal expenses, Vendor and partner contracts and product or customer engagement related expenses.
- Internal Costs and Expenses: In any startup, the majority of expenses for the first few years are for hiring the right teams and their salaries. It’s a delicate balance of paying for the best talent while having enough people to deliver the best products. With these in mind I used few of following strategies to hire and motivate the people.
a). No Pain, No Gain: As a founder or executive, it is important to be able to articulate the vision of the company and its potential. To get there, as the team, we all need to make sacrifices. The Pain comes from taking a lower salary and working extra hours. While the gain comes from when the company succeeds, is how everyone will make money as well as the experiences in their resume.
b). Salary vs Equity: Continuing on the above theme, having money to complete the projects and take it to market is very important. Having cash in the bank is key. As founders, we need to compensate who joins in our journey very early. Most of the time these compensation is disproportionally high towards equity in the company. In our first company, the first few key hires ended up making more than a million dollars which was huge twenty some years ago.
c). Beware of Salary Hogs: The market has changed lately with startups raising large amounts of money and paying employees handsomely. My early days, we discouraged managers from hiring people with disproportionately high salaries versus equity in the company. One reason was to avoid higher burn rate and to increase their involvement (skin in the game). Second reason is that these money oriented people can become disruptive to the team by asking for more money which a startup can’t afford to provide.
2). Vendor Partnerships: Second aspect of the expenses during company building comes from the tools and instrumental expenses. Especially for the hardware + deep technology companies, they need to acquire productivity and scalable CAD tools. They are not cheap. I employed following tactics to extend our runway:
a). “Free” Evaluation Licenses: Tool vendors provide evaluation licenses for a limited duration which allows for companies to try out their products. By building good and trustworthy relationships with executives/sales people at these companies, I was able to get tools for early development.The key aspect of this is building mutual trust prior to asking for a few licenses. For example, I had worked with a sales executive at an EDA company at a prior company and helped him win business for him. That relationship and trust provided me with tools to start the design without any financial commitment.
b). Need Based Usage Model: Once the evaluation period ends and ready to purchase, these tools can cost in many hundreds of thousands to millions of dollars. Big companies can afford to sign these contracts and most of the time these tools sit idle during various design phases. I proposed an idea of a time based licensing model where we buy a number of units (units are monthly costs) and we can pull the units as we need. This gave us freedom to pull additional licenses when needed and reduce the licenses during the idle time. This helped us save significant money while the vendor still received a large enough opportunity to participate.
c). Write Articles/Reviews: After the above two tactics of reducing cost, as final negotiation point, I agreed to write reviews or articles about the vendor’s products in trade magazines in return for additional licenses or discounts. This was a win-win for both companies as both of us get publicity and wider exposure.
d). Back Loaded Contracts: I learned quite a bit of payment terms during these negotiations. Being honest about the vision of the company and financial status, vendors may agree to work with us on the payment terms. I worked with the CFO of the company to find ways to develop payment terms which will be back loaded and align with our next funding cycle or product launch.
3). Production and Product Costs: Final part of the financial management at startup is managing product manufacturing and launching in the market. First of all it is important to budget for the tail end of the development and productization. Many startups fail to plan that far and run out of money to build the product. These are some of the strategies we used to optimize the expenses while addressing customer needs:
a). Opportunity Cost: As we developed our products in Silicon Valley, the local manufacturing cost was high. Going to Korea, China or Taiwan would take longer to get the product. It is important to balance between the shorter local expensive manufacturers and cheaper facilities remotely. I always used local facilities which can help us with fixing any early manufacturing issues as well as my development engineers can be there at the facilities to fine tune the process. This helps us get the product to customers quickly and get to market sooner.
b). Choosing Manufacturers: I tried to choose local manufacturers who have larger facilities with similar manufacturing lines at lower cost locations. This helps reduce the quality issues as well as reduces the time my engineers had to spend communicating with remote teams.
c). Share the production line: In semiconductor manufacturing, just the cost of manufacturing can go into multiple millions of dollars. One of the ways to reduce the cost is by sharing the wafer with few other customers which costs only a fraction of total cost. I planned with manufacturing houses to plan and deliver our design to meet the time for starting the production. Since early production volume would be small and there could be potential changes due to bugs or customer feedback, this a very optimal way to reduce the financial burden on a startup.
d). Automation: Automation applies to all three aspects of minimizing costs. I designed a billion transistor designs with only fifteen engineers at the first company. To scale the design and reduce the careless mistakes, we extensively used automations. For us automation means that script for any repetitive work, tools for pattern identifications, continuous batch jobs for early detection of errors or anomalies, etc.
I hope that these nuanced approaches to the financial expenditures and health of the startup resonate with founders. Financial books and education teaches how to negotiate efficiently and win in negotiations. I have provided some behind the scenes and tried and working strategies for success. Hire right, build partnership with trust and launch the product with cash in the bank to withstand any headwinds.