February 25, 2007

10 best ways to burn capital

Posted in Economic Model, finance, management, Planning at 6:35 pm by scottmaxwell

Sometimes seeing how best to achieve the opposite of what you want to achieve can help you to clarify what you should do:

10 best ways to burn capital

  1. Hire a complete set of senior managers ASAP after forming your company. The great thing about senior managers is that they will want to hire other managers and you will end up with more layers of management to spend money on!
  2. Hire the senior managers from large companies. They are even more inclined to spend money on additional management layers as well as many different staff functions.
  3. Locate your team in an expensive city. Your staff will need more cash comp to live, so your salaries will be higher. Also, your rent (and everything else) will be higher!
  4. Ramp up your staff quickly in anticipation of high demand. Your current staff will spend more of their time recruiting and training (lowering productivity) and your new staff will have a lower utilization as well. If you do this really well, you will build a long-term culture of not being productive that will last through all phases of your company’s evolution.
  5. Use your marketing resources on branding and try to brand what you don’t have. Focussing your marketing efforts on lead generation and product marketing will have too much capital efficiency to meet your goal of burning capital.
  6. Use your sales resources on field sales and large company partnerships. These are the activities that cost the most and take the longest to turn into revenues. Activities like telemarketing, inside sales, and developing the natural business partners are too capital efficient!
  7. Put a large development team in place and then focus your development staff on the core technology and ignore the packaging and UI considerations…then hire some professional services, training, and customer service staff to help your customers implement, configure, train, and resolve issues.
  8. Do not hold staff meetings or company-wide meetings or other communication methods to help focus your team (e-mail, IM, etc.). This will create too much clarity and resolve too many questions.
  9. Get backing from 2 or more VCs with very large funds…the larger the better! They have a need to deploy more capital and will own more of your company over time, so will be less resistant to these ideas.
  10. Never, ever, ever put in place management systems such as budgeting, metric management, or incentive systems that drive the right activities. If you do put in place the management systems, be sure not to focus them on the key drivers of your business.
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4 Comments »

  1. Dan Cornish said,

    In other words, don’t spend money on stupid stuff. Great post!

  2. scottmaxwell said,

    good summary Dan 🙂
    S

  3. Kerry said,

    All these points are right on the mark.

    One complementary point comes to mind. That is the use of “gates” rather than “dates”.

    Ventures typically define their spending based on the calendar. For example, “execute marketing launch in September”

    I have found it works a lot better to schedule your spending not based on a date but based on an observable event, preferably an externally measurable event. Achieving this metric acts as a “gate” on when you execute some spending/hiring. For example, “execute marketing launch after having 3 users willing be public references”.

    Obviously the definition of the right gates will vary tremendously depending on the nature of your business, but the basic idea of using gates is applicable across all ventures.

  4. Steve said,

    Also make sure to hire sales people who only have experience selling products (if you are selling a service) and vice versa.

    Been there. Seen that.


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