This article was originally posted on swombat.com in December 2011.
If you try to sell things to businesses (as I do in the context of GrantTree), you’ll notice a split in the mindset of people who run companies.
“Can I have it for free?”
Some people are unwilling to pay for anything. No matter how appealing the product might seem, how tangible the benefits it brings, how proven, safe, secure, universally lauded the product is, some people will try to get it for free, and not buy it if they can’t.
Even if you’re providing a service (which, as I’ve argued before, has immediate tangible value in most people’s minds), they will ask if you can do it for free. Or at a 90+% discount. Or maybe you can get paid later.
In the worst incarnation of the zero-cost entrepreneur, you find people who will offer you shares in their business in exchange for your work. I call this one the worst, because I feel very strongly that founders should treasure their shares like the precious life-blood they are. Also, as previously pointed out, experienced entrepreneurs know the value of equity and preserve it. If someone offers you shares in exchange for your work, they obviously don’t understand the value of their own equity – or perhaps they just think their equity is worthless. In either case, their equity is indeed mostly worthless.
This zero-cost entrepreneur mindset is more likely in young businesses by new entrepreneurs, than in later efforts. As a business grows or an entrepreneur acquires experience, a seemingly magical transition occurs. Most businesses come to a point where they decide that spending money for tangible benefits is fine. Before: “no way, we’re not spending anything on recruitment, where can we advertise for free?”; after: “$350 for a Stackoverflow advert is fine if it will give us a selection of good candidates”.
Even more dramatically, the mindset shifts from “we want everything for free” towards “stuff that’s given away for free isn’t really worth anything”. This is somewhat similar to the App Store mindset that free apps are worse than paid apps, so don’t even bother looking at the free apps, because your time is more valuable than the $2 you might save.
GrantTree charges a refundable setup fee to get started (2018 update: we haven’t done so for a long time! The market moved…), and while we’ve had people tell us they didn’t want to pay it (they didn’t become our clients), we’ve also had others telling us that if we hadn’t charged them a setup fee, they wouldn’t have taken seriously (they did become our clients).
So, what’s the deal here? Is one mindset better than the other? Are zero-cost entrepreneurs “bad”? Should they be lumped in with people who offer up equity for bits of work that really don’t deserve it?
Credit cards and paying for things
Here’s an interesting parallel with the domestic world. On a personal level, people often evolve through (at least) three phases of credit-worthiness.
First, people (at least in the UK and US) often get credit cards before they’re ready for them. What happens then is sadly predictable: they overspend and get in debt. A lot of people never seem to get past this stage 0 of financial responsibility by themselves. They stay in debt, let their debt balloon, maybe declare personal bankruptcy, and at that point, they’re forced by the system to go to stage 1: learning to be on top of their expenses (because they can’t do anything else, since they have no credit).
In stage 1, the person learns to be financially responsible, to manage their expenses tightly enough to make sure they can always pay their rent and other essentials. Finally, once a level of confidence about personal cash flow management has been built, they can progress to stage 2: responsibly using advanced financial instruments like credit cards (which is possible!).
The evolution of business owners seems similar, with perhaps fewer people stuck on stage 0, at least in the parts of the world, outside the Valley, where money is scarce (I don’t have enough direct experience of SV startups to comment here, although it does seem that they are quite willing to take on large fixed expenses without any way to sustain them other than raising further investment).
Stage 0 being a willingness to spend without control, stage 1 is the time when control is built, when founders learn how important it is to keep track of cash flow, reduce fixed expenses, etc. Since this new control is a reaction to a fear of stage 0, it is often an overreaction. “Since keeping on top of expenses is difficult, let’s not spend anything”.
Is it unhealthy? No, I don’t think so. If you don’t feel confident managing your cash flow, it’s very reasonable that you should cut down your expenses as much as possible. This is why investment is dangerous to new founders: it enables them to let their expenses grow without learning the hard lessons of keeping on top of cash flow. Perhaps this also explains why so many Silicon Valley VCs feel compelled to bring in a “grown-up” to manage the business more closely, when they invest a large sum into a promising startup.
At the same time, I think it’s important not to think that stage 1 is the best place to be. Overreaction is not a healthy long-term lifestyle choice.
The healthy path is, as always, in the middle. You do need to be on top of your cash flow, but spending when it makes sense does, well, make sense.
If you can spend $100 and save yourself a day of work, you should not hesitate to do so. Even if your company is pre-revenue (perhaps especially so), being able to move quickly, when you know where you’re going and how to get there without falling, is important and worth investing in. Learning to leverage your cash reserves to generate more income faster is as essential as learning to keep cash in the bank.
There are many things that need to happen in a business, and most of them are not critical for you to do personally. For those, you should bring in other people or products, and if you want good work out of them, you’ll have to pay for them.
So, I guess the take-away from this article is:
- being out of control of your spending is bad;
- cutting down your spending to the minimum is a natural reaction to the fear of being out of control, and you should keep costs as close to zero as possible until you are in control;
- the best situation is to be in control and have the willingness and judgement to spend money where it makes sense, rather than try to keep every cost to zero forever.
Thoughts from 2018
This article has aged a little, particularly the reference to setup fees, which we haven’t charged for quite a while now (without losing the clients we wanted to work with!). I also would argue that it’s oversimplifying things a bit in some ways. I chose to repost it anyway because I think the concept of zero-cost entrepreneur is valid and exists in the world and it’s helpful to be able to identify that this is the sort of person you’re speaking to.