Startups, whether in Silicon Valley or Denver, Colorado, are infamous for being extremely lavish with their resources. Although this extravagance is explained as a necessary tool to attract and retain top talent, it often causes startups to experience undue stress and requires them to seek extra funding, which can be problematic in the long term. Moreover, it is worth pointing out that the notion of entrepreneurs being overindulgent with their startups is backed up by data as opposed to being purely anecdotal.
With that said, the drawbacks of squandering money, especially when a company is still starting out, are serious. First off, it forces an entrepreneur to waste an inordinate amount of time raising funds instead of focusing on establishing his or her main business.
Furthermore, the more investors get in on the action, the more diluted the original entrepreneur’s shares become. In other words, every time funds are raised, the original founders end up owning less and less of the company they are building. Eventually, this may lead the founders to lose all control over their company, which, in turn, may leave the company open for a takeover, causing countless employees to lose their job. Therefore, in some situations, the perks that were meant to keep top-tier talent around may become the very cause of them getting fired. An excellent case study of the importance of tightening up the budget is Etsy.
American entrepreneurs may be able to learn some good lessons from their Chinese counterparts. Naturally, the inhumane working hours and general lack of sound HR practices should be ignored, yet what should be emulated is the frugality, such as reducing the office space allocated to each employee when compared to startups in California.
Although reducing costs is a critical move for a startup’s long-term survival, it is a tiny piece of a much larger puzzle. In fact, managing a company is like overseeing the inner workings of a watch: there are plenty of moving gears to oversee, and plenty of things can go wrong. Therefore, any entrepreneur who is considering cutting costs but uncertain where to start should reach out to an experienced lawyer who can help point out the necessary costs from the superfluous ones.