How <i>not</i> to spend money

The cash just flew out the door. Of course, we all know of the lavish launch parties with blue cocktails and the acres of free sushi. Perhaps it was social policy that led companies to feed the entire community, but more likely it was too much money and too many people willing to spend it.

"Back then" there was no shortage of fleecing machines ready to extract the excess venture capital, from caterers to PR firms to Web design houses to advertising firms.

Isn't it funny how cash becomes king now that there's less of it? To anyone working with early-stage technology companies today, it's no secret that tightfistedness is an essential trait of an entrepreneur.

Here in the trenches, the reality of companies with fewer than 20 people on staff is defined by two principles: less cash to spend and bleak prospects for getting more.

So, what are emerging as the rules of the cash game?

First, smart start-ups are eliminating anything that doesn't relate to customers or product. PolyCom phones, Aeron chairs and oxygen bars are the first obvious cuts. Then there are the less obvious ones: office space that "plans for growth" and any kind of marketing outside of the junior "marcom" person.

Oh, and then there's the Web site, which, unless you're an application service provider, should cost you a few thousand dollars or less to produce. Sure, as the product line grows and the company matures, you'll spend a lot more than that. But for now, savvy CEOs are avoiding the agencies and finding one of the zillion unemployed Dreamweaver jockeys.

Next up is getting attention for a nascent start-up without a circa-1998 marketing budget. As we all know, editorial press is the cheapest and most credible marketing. So what is the best way to generate press? "Building buzz" used to mean just hollering as loud as you could (read: expensive advertising and sponsorships) and worrying about substance later.

But as I coach my companies, the only thing that really counts is customers. Real "first-mover advantage" means the first company to bring in revenue from solid customers, not the first to create marketing hype. With only certain exceptions, press releases without customers should stay in the draft file.

Press people can smell hype. And don't kid yourself into thinking the fat retainer to the PR firm is going to get a nascent company some press. Working toward real product with paying customers is a much better use of capital early on. That's what wins ink.

What do the smartest seed-stage companies spend cash on? I always vote for top-notch salespeople, but that's an easy one, since salespeople theoretically pay for themselves (and are also the easiest underachievers to ferret out).

There's also the top-notch product people. A good product manager is always a good investment. And it goes without saying that solid engineers are a good bet, but I emphasize quality; keep the team small and first-rate.

If you're squeezing pennies, how big a team do you build? Of course, it depends, but consider this: I have six portfolio companies and, as of this writing, none of them has more than 20 people; three have fewer than 10. The mix is universally 70 percent to 80 percent technical, one admin, one CEO, and the rest of various business types. Of course, if you raise the big VC round later on, you're going to bulk up from there.

Garage sale on used gear
Next up is equipment, where Internet-era wisdom had you rolling in the Dell boxes courtesy of a fat lease line. But leasing companies are now wallpapering their offices with bad start-up leases, and small companies today have to shell out real cash for equipment.

The good news is that the Net meltdown has filled the classifieds with mountains of inexpensive gear. So even if a lease line is available, the more fiscally wise companies are now comparing the tougher terms of a lease with the pennies-on-the-dollar rates for used equipment.

Finally, you get down to a bottom-line number. How much should a company be spending? The smart CEOs figure it's around $10,000 to $15,000 per head at the early stage. That means a 10-person company can pull in a seed round of a million or two and have plenty of time to prove to a top-tier venture capitalist that he or she is barking up the right tree.

So here we are. The party is over, and we're all back to being incredibly conservative with our cash. I won't insult the CFOs out there by saying less cash is good, but it's certainly a focusing factor for seed-stage companies. We can only hope that less time spent on the expense items means more focus on the revenue line.