One of the biggest problems for founders is knowing when to spend your startup’s cash. You don’t always know when you’re going to need money, and there rarely ever seems to be enough of it, so, the tendency is to covet it — sometimes to your company’s detriment. It’s a given that you’ll have to pay for the high-level services of a corporate lawyer, but there are dozens of other mission-critical chores and functions that have to be done, too. How do you know when the time is right to spend money on marketing, or on a booth at a trade show? Is it worth it to pay a professional to design your website? What about to a PR specialist who can “get the buzz out”?
These questions aren’t new. Even the most successful entrepreneurs often will say they made such decisions “on the fly” (and thus, didn’t always have money when they really needed it.) But today I had lunch with a 26-year-old founder with a few astute *rules for “Startup-Spending Triage.”*
*Marc Barros* and his cofounder, *Jason Green*, launched their Seattle-based company,”Twenty20″:http://www.twenty20camera.com/ in 2004, just as they were graduating from the University of Washington. In three years, the pair has grown their now-7-man startup on little more than a $100,000 commercial line of credit. (Marc says they recently closed their first angel round of funding, worth “several hundred thousands dollars.”) That’s pretty frugal.
But what makes Marc’s spending tips so convincing, is that his startup isn’t in the relatively low-barrier-to-entry Web2.0 software space. *Twenty20 is in the consumer electronics business.* Let me repeat that: Barros’s company makes *a mobile video device*, which means his potential competitors are gigantic hardware makers like Sony, Samsung, phone handset makers like Motorola, Ericsson, oh and um … Apple.
Twenty20′s cameras let consumers shoot TV-quality digital video while they’re in motion, and hands-free. I held the latest prototype: it’s small (8 ounces), durable, sleekly-designed (no cords!) and comes with multiple mounts so it can attach to a helmet, a bike handle bar, or the lip of your golf bag. Marc says the camera will operate from a single on/off switch, with auto-focus and auto-framing. No need for a preview screen, no messy aperture adjustments. The goal: “video in motion, made easy” so exhibitionists can film their daily walkabout, without looking like geeky automatons. (Think “Justin.tv”:http://www.justin.tv/ with less gadgetry).
Check out the specs of the “Vholdr”:http://www.vholdr.com/shoot.php. It is Version 2 of Twenty20′s device. When released in December, it will retail for $350. (You can “pre-order it for $50 on Twenty20′s website”:http://twenty20camera.com/store/product.php?productid=16156&cat=266&page=1.) For now, uploading your video to the Web still requires a stop at your computer, but Version 3 ought to automate this from the camera, remotely.
Cool, huh? Anyway, back to how Twenty20 got this far in the first place. Without further ado….
*Marc Barros’ 3 Rules for Triaging Your Startup’s Spending:*
*1) “Do it yourself first, so you know the value proposition.”* Marc has a degree in accounting, but he wrote his company’s first press releases, and taught himself to code in html so he could design his company’s first website. Only then could he understand how difficult professional-grade graphics and PR can be, which gave him a benchmark for when spending money to get such services was vital to Twenty20. Answer: it wasn’t, until now, when the company had angel money and Version2 of the Vhldr ready to go.
*2) “Figure out how you can get the same result elsewhere (or from someone else), for less.”* As Twenty20 is in the hardware business, the company has to pay for “UPC codes”:http://en.wikipedia.org/wiki/UPC_code for its devices. “That costs us $2,500 a year. But I was able to find agents who buy the codes in bulk and will sell them to you over the web for $40. To an underfunded startup that’s a huge cost-savings. You just have to look around.”
*3) When costs are no longer negotiable, pay late.* First of all, you’re not ready to buy a booth at a trade show until, duh, you have something ‘to show.’ But even then, you can mitigate the drain on your cash by paying the bulk of hefty booth rental fees late. “We always pay the deposit, but never pay the balance of the fee until we’re there in person. They always call, and call. But even if they tell you they’ll give your booth away, they won’t. [Show operators] need you. And the value of that cash in our bank account is far greater to us than it is to them.” PS: you can also stall on paying off your corporate lawyer’s bill. Seriously. Just try it.
*4) When you can’t afford a fee, align the vendor’s interests with your own, and you’ll get a BIG discount.*
“Part of your job as a founder is to get the people sitting across from you at the negotiating table, sitting on your side,” says Marc.
We know this is great strategy. It happens also to be great cash flow management. A big ticket for startups is the *patent process.* Twenty20 didn’t have the money to pay award-winning firm “Ziba”:http://www.ziba.com/aboutus.aspx?currentNav=6 to design the Vhldr and also bankroll a patent portfolio. So Marc accepted a contract with Ziba that allows Twenty20 to pay Ziba about 1/3 of the original design cost, and do so in “royalty installments.” In exchange, Ziba gets co-ownership of Vhldr’s patents, but on top of this, Ziba did all the work to file them with the U.S. Patent & Trade Office — thousands in filing costs that would have come out of Twenty20′s pockets.
Startups are usually jealous of their IP, but Marc has his priorities straight: “I figure if we go under, we’re not going to be able to do much with the patents anyway. As long as we make our payment schedule, we co-own them, and we both benefit.” Patents + great design, all for less cash out-lay!
Ziba’s interests are now further aligned with Twenty20: Ziba Creative Director Steven McCallion sits on the board, so even if Marc is late on a payment once, we’re betting his vendor — now partner — will give him a reprieve.