Need Business

Why CEOs Shouldn’t Spend Until They Feel The Pain

My team might call me cheap. My investors might call me conservative. Yes, I am pretty tight with our company’s purse strings. But I have another word for it: prudent.

I am the CEO of Kohort, an early-stage startup that only recently unveiled its product at TechCrunch Disrupt with the support of OPEN Forum. At this stage in our company, it’s common wisdom that we should be cheap—bootstrapping in any way that we can.

But intuitively spending less isn’t always prudent, smart or the right strategy. You can starve your business, miss opportunities that needed funding and fall behind. There is a business interpretation of the phrase “go broke saving money.”

So why act like scrooge? While purse strings can be opened over time, I’m a believer that CEOs should invest behind pain. Put another way, I don’t believe in spending against issues until they threaten to cripple our company. Whether it’s hiring a new member of our team, adopting new software or buying some nifty hardware, I believe that we shouldn’t buy it until the “want” becomes a “need” and eventually transcends to a “can’t live without it.”

To be clear, can’t-live-without-it status is something special; it’s more extreme than a perceived need. And, it’s certainly a higher standard than a nice-to-have. Can’t-live-without-it is only achieved after a need comes knocking repeatedly and stakeholders make their cases enough times to get twitches.

In some cases, however, we do reach can’t-live-without-it quickly.  For example, when I hear “we will never be able to launch our product without [fill in the blank]; it’s the bottleneck right now,” the buzzer goes off and we spend. On the other hand, when I hear “this will be really [helpful/  enhance productivity/make our lives better]”, I wait.

What if the petition is logical, well-baked and truly a benefit to the company? I still wait. Why?

There are three reasons.

First, while a month seems like a long time in the development of a TV show or a personal relationship, it’s only a flicker in the life of a company. In most situations, a month doesn’t matter.

Second, needs evolve.  In an early-stage company, what seems urgent today might be irrelevant tomorrow. In order to ensure that we’re investing behind resources that we actually need, my team must be certain that the need is persistent and well-defined. And pain clarifies need. The more pain we feel the more efficiently we’ll deploy capital.

“We need a sales person? Okay, do we know right now whether we’re better off with field sales, telephonic sales or an account rep to handle the relationship after the close?”  Very often you’ll need to sell a few customers before you’ll know that for sure.

“We need an office? Okay, where should it be located, how much space do we need and how many conference rooms are required?” Very often you’ll need to see how your team is operating day-to-day and obtain some visibility into how you’re scaling in order to make that decision.

Third, there are switching costs. Hiring the wrong person and signing the wrong lease and undoing it is more expensive than not hiring anyone for a few extra months. The costs of undoing a hire or breaking a lease in an office come in both the form of capital and time. When you get your calculator, estimate severance or the cost of breaking a lease, but don’t forget to assign a value to the time spent in meetings or the impact of having your team change or relocate on culture. The latter is a hard number to estimate and therefore it’s often overlooked—but it’s real.

Call it whatever you want—“buying slow” or, as I like to say, “investing after pain.” Only when it hurts really bad will I fund it, because if it’s not that painful we might be better off saving the money.