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The Art of Frugality In A New Business Venture

Revenue & Finances

Tammy Slaughter wrote this article

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frugality (noun):

 

The quality of being frugal, or prudent in saving; the lack of wastefulness.

Benjamin Franklin was famous for his love of frugality.

Amongst his many other accomplishments, the timeless Poor Richard’s Almanac was full of pithy sayings on money, like “Haste makes waste”, “Great spenders are bad lenders”, and “Rather go to bed without dinner than to rise in debt.”

Here’s the thing: Benjamin Franklin didn’t have anything against the accumulation of money or wealth (he was in fact, a self-made man of means himself), but he understood the dangers of living as if one has means, when in fact they do not.

To Franklin, it was not only detrimental to successfully moving forward, it also had social ramifications.

Franklin seemed to understand that the entire world was hurt when someone lived ‘expensively’.

Perhaps now, amidst the Covid19 Pandemic, we are feeling this even more acutely in the business world, as just 8% of all businesses who applied for loans under the Paycheck Protection Program were approved.

Astonishingly, more than fifty publicly traded companies so far have disclosed nabbing nearly $250 million in PPP funds meant for small businesses. Construction companies were first in line, despite still being able to operate in many states, followed by large restaurant chains. Meanwhile, local retail and restaurant doors remain shuttered.

Since the news broke, Shake Shack stepped forward to return the funding they received to much positive acclaim. Bear in mind, however, they were sitting on over $112 million in cash already, and they had also raised over $150 million from investors in light of the pandemic.

We’ll let you draw your own conclusions there, but in the age of social media, now more than ever, it pays to operate your venture frugally.

Doing Things Differently For Your Startup

Being frugal in business does not mean that you are afraid to spend or to raise money.

It’s about spending money only on what you know is going to bring you clear value, and raising money when you have clear need to do so.

A much-discussed phenomenon has occurred in the startup world in recent years, where VC money is seemingly boundless and many seem to feel it’s akin to a ‘right of passage’ to raise money for their startup.

It’s not.

Raising money for your venture is, and should always be, treated as a means to an end. It is not necessarily a business accomplishment in and of itself, however, with the right game plan, it can empower you forward to be a shining star in your industry.

You do need to be careful about giving away too much equity, however.

But as of this writing on April 21st, 2020, 4 out of every 10 startups will die in the next three months if they do not raise additional money or increase revenue — a 31% increase from December 2019, according to a survey by Startup Genome.

Right now is demonstrate-ably that “Do or Die” moment for startups to raise money in order to stay afloat.

But now, amidst a pandemic and outside of that ‘VC Bubble’ many seem to have been enjoying, they are finding raising money to be a much more difficult endeavor. All this, of course, after a series of failed tech IPOs (WeWork — need I say more?) hit the market last fall.

Long story short, things don’t look good for startups looking for VC-backing, or for VCs themselves, as we all learn to navigate these uncertain times together.

That isn’t to say it’s impossible to raise VC money right now, as more than a few opportunistic and eagle-eyed VCs have earned their fortune making a bet during an economic downturn.

But in the months to come, many startups are going to be making difficult decisions to stay afloat, and what many like to avoid saying (but we are going to, for your sake, dear reader), is some of that could have been mitigated if they’d been observing the art of frugality in a new business venture all along.

The Difficult Road Ahead Is Paved with the Spoils of Startup Splendor

Large, airy open-floor workspaces.

Hiring blitzes.

Break room with all the fixings.

These are all expenditures one typically sees once a successful startup has established itself, or is looking to do so.

Here’s the thing: You don’t need this to be successful.

In most cases, you don’t even need a dedicated office space, as many companies are discovering for themselves amid Covid-19.

The days preceding the mandated stay-at-home order were filled with announcements of VC darlings like Wayfair and ZipRecruiter laying off or furloughing employees.

They were forced to scale down to only the bare essentials, which begs the question: Why staff so far beyond their means in the first place?

Hustle culture and hyper-growth is typically what’s expected at a VC-backed venture. But that’s not every venture. There’s a reason unicorns are exceedingly rare.

 

Many startups expect to follow this path anyway: Raise Money, Scale Big, Fail and Go Home, or Win to Fight Another Day (or successfully exit).

 

But there’s a middle path here to be carefully observed, and that’s methodical growth and careful scaling for your tech startup.

You never want to get too big for your britches, as many unicorns are now finding out the hard way, with only a few months of runway left in the current climate.

Keeping Your Eye on Your Bottomline

This seem obvious, right?

But too many startups get overeager about ‘officially launching’ their app to the world.

Each and every day should be treated like the launch of your app. Coming up with new ways to position your app, build traction, and gain future users — this needs to be a day one endeavor tackled daily for a successful app launch.

 

You might be tempted to bring on additional team members, and start looking at renting out dedicated work spaces to base your app operations out of, but hold your horses.

 

Once your app is officially launched, your needs will vary widely.

They really will. You need the flexibility and freedom to be able to quickly pivot, and adapt in a chaotic marketplace.

Getting yourself locked into a lease before your app is launched is putting additional stress and financial variables that could otherwise be effort spent towards your app (or whatever other unknowns may need to be tackled).

According to a survey by Gartner, CFOs and enterprises are making key shifts to manage cash via COVID-19 shutdowns:

– 81% of CFOs plan to exceed their contractual obligations to hourly workers and to fund that they are using remote work to offer flexible schedules and maintain operations.

 

– 90% of CFOs said their accounting close operations will be able to run effectively without disruptions off-site.

 

– 20% of CFOs said they are cutting their on-premise technology spending with 12% planning the same move.

 

– 13% of CFOs have already cut real estate expenses with another 9% planning cuts in the months to come.

 

–  Nearly a quarter of respondents said they will move at least 20% of their on-site employees to permanent remote positions.

If there is any place to spend time, money and effort early on for startups, it’s in your marketing efforts.

Just be sure to focus on building up a brand platform filled with original content that’s mission-focused, not necessarily spending money on advertising early on.

This will help you earn an early audience of highly-relevant supporters quickly and most cost-effective to your efforts.

It will also add an extra layer of ‘legitimacy’ and authority to your brand, even as your approach app launch.

It’s About Optimizing Your Budget — Pandemic Or Not

According to another survey by Gartner, nearly half (42%) of all HR leaders are finding it difficult to save more money than they already have.

For many companies out there, the “ad hoc cost-cutting pressure” is difficult to face right now. Reducing employee work hours and head count, freezing hiring and promotions, even limiting service offerings, are all active measures being taken in order to cut operating costs across the board.

This unprecedented right-sizing happening at companies right now requires tailoring like no other — businesses need to be able to rapidly bounce back at the first sign of ‘normalcy’ in the marketplace, even as they focus on scaling back.

Cutting costs towards things that may have previously been the lifeblood of your company is far from easy, but it can be quite gratifying to come out on the other side to realize that what makes your company ‘tick’ can still exist in a much leaner fashion.

Moving forward, companies and startups alike should focus on making more effective use of technology to increase work output and reprioritize processes.

As Benjamin Franklin himself once said, “For every minute spent in organizing, an hour is earned.”

About ChopDawg.com: Since 2009, we have helped create 300+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

 

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