Startup 101: Capital efficiency

You may have read in BusinessWeek or TechCrunch when iWidgets closed an A round in January, despite the tough economic climate. In addition to having a strong product that solves a big headache for content publishers, a big part of why we got funded is our capital efficiency.

iWidgets spent only $1.5M in 18 months to bring our iWidgets platform to market, launch it with a major customer (CBS), and then sign three more customers.

Our leading competitor spent $10M in the same amount of time, just laid off a large portion of their staff, have no business model, and a product that solves yesterday's problem.

While you can’t build a business without a plan, capital efficiency is the often-overlooked key ingredient for a successful startup. Capital efficiency isn’t just about not wasting money, it’s also about not having any fat. Too often, bloated, fatty companies are insulated from market realities — you can’t feel it when the road starts to get rough. So it is not just in this economic climate that startups should be capital efficient, it is always.

Here are the eight cardinal NO’s of capital efficiency, plus the four things you HAVE TO spend money on.

- No Management

A small team of top-notch engineers does not need a VP of Engineering, it needs a technical lead. An Engineering VP costs a bunch of money, and in a fast product cycle does nothing but slow things down. For most of iWidgets' life, the company was composed of four engineers and me. We had a very clear direction: We wanted to integrate website content deeply into popular destinations. But there were a million features that we could do, and we iterated a few times on which ones to include, until some started to stick in the market. We did not have to ship a complete, moon launch product, and we did not have to have big team meetings to align ourselves. I would say, “I met with these three companies, I see a need for X at each of them, let's do a minimal version of the feature and see if they bite.” We did this a few times before we had a product that people needed. Adding a bunch of chiefs to the mix would have only slowed this process down.

- No Sales

A sales person is going to have a quarter to ramp up and set up Salesforce just the way they want it, is going to require sales tools, and is going to come up with a million reasons as to why an account is moving forward. They are never going to tell you your product sucks or that no one wants it. Why would they? They’d be out of a job. The worst thing is, they are shielding you from the market. The CEO needs to hear the “NO.” The CEO needs to get the blown off by a friend of a friend at a large media company. Why? So that he/she can get a sense of the market. It is the job of the founders to get a few customers using the product. A sales guy is not going to do it for you and is instead just going to waste money.

- No Marketing

VCs are going to tell you that you need a marketing person. In my experience, there are very few marketing people that can function in a pre-product company. Their role is essentially market research at that point, and for that you should just use consultants. But I know of plenty of companies without marketing people that have great marketing. At iWidgets, where we have been in the business and trade press countless times, constantly have inbound calls from major media organizations, have a clearly differentiated product, and a business model that prospects like. Once you have all that, a marketing person will do great, because they can actually execute. But a marketing person is not necessarily going to get you all that, and in fact is likely to get in the way.

- No Tradeshows

I have a policy of no tradeshows. They are a complete waste of money, especially if you have to travel and put together a booth. But policies need to have exceptions. We bought a $5K booth at the Facebook f8 developer's conference because it was cheap, plug-and-play, and a great opportunity for us to get feedback about our product since we had just launched into beta. We also thought that we would meet a lot of Facebook folks, but instead our booth was deluged by Google employees working on OpenSocial and iGoogle.

A huge decision that took a lot of hemming and hawing was launching our 1.0 product at the Demo conference last year. The Demo show was $18,500 + travel: super expensive. Ordinarily I would not even consider spending that kind of money. But we were launching with CBS, and the SVP of Entertainment at CBS had kindly agreed to participate in our launch on stage. Given that, we had to provide a venue suitable for such a senior executive, I don't think he would have done it at a free-for-all like the Techcrunch50. As a result, we got inbounds from every television network within two days. I still look back on that and don't know if I would spend that kind of money again, but what's done is done, and I have no regrets.

- No Office

We didn't have an office for over a year, and would have staff meetings around my dining room table. We had a constantly running Skype chat window where everyone could talk to each other. Once the engineering team got to 5 people we sublet a few desks for engineering from a friend of our CTO. Once we had a signed termsheet for our Series A, we got an office, and instead of an office ended up getting a live/work loft because it was cheaper (and better!).

- No Servers

This is a big one for me: Do not install a single server. Use SaaS for everything, even source code control and bug tracking. You will save a ton of cash and will not need any IT people. We use SaaS for everything, including Amazon EC2/Rightscale for our website and backend, Google for email and wiki, CVSdude for source code control and bugzilla bug tracking, BrowserCam instead of a QA lab of machines, Quickbooks Online for accounting, Zoho for CRM, Packetel for Fax, Egnyte for file sharing, and TriNet for HR/Payroll.

- No Administrative Staff

Do it yourself, you will actually know what is going on in your company. I once briefly worked with a guy at a pre-revenue company that needed a ton of infrastructure, including an admin to take notes and log action items during his staff meetings, and even hired a consultant to fire people for him. Needless to say, a lot of money got spent with very few results.

- No Travel

Skype video. Enough said.

And now that you know the NO’s, here are the YES’s, which are just as important.

- Yes Engineers

Hire the best you can find.

- Yes Lawyers

They feel like a rip-off, but hire lawyers that understand startups. And get them to kick some cash into your seed round which covers what they are charging, so it turns out to be a wash.

- Yes Bookkeeping

Use Quickbooks and a part-time bookkeeper, they are cheap and your accounting will be suitable. P&L statements are an important way to keep track of what you are spending money on, and investors are going to want to see it.

- Yes Wireframing

Wireframe everything before building it, it will save a lot of time and mis-steps, and therefore money. I am a big fan of Axure Pro and we even wireframe simple three step wizards to make sure they are understandable and flow smoothly. It is better to figure out early what works, validate new features with customers before they are implemented, and the engineers appreciate getting a straightforward spec that is not going to be subject to too many changes after the feature is added.

As I’ve pointed out, sometimes you have to break the rules to take advantage of a one-time opportunity, but these are the guidelines I’ve developed over the years and I’d recommend them to anyone starting a business — not just “in these tough economic times.”