Making sure you make money from your business

These are notes from a whiteboard session that I led at BarCamp on Saturday. There were plenty of people in the room for the end of day session, and we had an excellent discussion.

We were trying to answer the question of how to make sure to make money from your business, and so we started with the bigger question:

Why do we start businesses?

It took a little while before my favorite answer came back – which is “to change the world“. My next favorites were variations on to “fix a frustration” or “solve a problem” and I was also really pleased to hear “to have fun”, which has to be included in any business.

It was a trick question of course, given the title of the session, and naturally we heard pretty early on that we start businesses “to make money”, or “to get financial freedom”. That may be so, but unless we want to fix a problem, change the world or create something cool then the money will be a distant dream.

Final kudos for the most honest answer, which was “because we can’t find a job”, or, as I put it, “because we are unemployable.”

The next question was What are the things you need to make sure you make money?

The answer was to make sure your company makes money, and to make sure you make money out of your company. We didn’t really get to the second part of that, but the first part created some good discussion.

The first answer from the group was a goodie – “Don’t spend money”. That’s directionally correct but first of all you do need to actually earn some. Indeed the answer to this question is simple – “earn more than you spend”

Above all you want to earn excess money – so called economic rent, whereby you have an ‘unfair’ advantage over competitors. You do this in a number of ways, but I like thinking of Microsoft and Apple as exemplars of the art of being able to charge more than a ‘market’ price. Microsoft does it through it’s market domination – the network effect, owning standards, first mover advantage with Word, cutting the right deal with IBM and so on – the list is legion. Apple does many of the same things, but adds a product development process and company that keeps delivering stunning products well before their competitors.

But back to costs. While you do need to invest, I’ve always felt that the golden rule is to treat any money the company has as you would your own. That doesn’t mean you should spend it all on taxis, beer and dinners, but to watch every penny.

That means no fancy office or chairs – but use your kitchen table or a succession of cafes. It means no high salaries, but working full time while you develop at nights and in weekends.

It means being stingy about everything that isn’t core to the success of the business – and pay with equity wherever you can.

Once you are full time then you will need to pay yourself, but make sure the business can support it and pay yourself the bare minimum to live. As the company becomes more solid start paying others and gradually move the salaries up to a fair wage for each role. Don’t overpay yourself as there are other shareholders that have a right to the profit stream.

It is important that you bring the right people with you. You’ll need  mix of skills and experience to succeed – and you probably don’t have all of those yourself. Even if you do, as you grow you’ll need help. So bring others in early, give them shares in the company and then each person can do the things they enjoy, that they are good at and that they are willing to do for fun and equity rather than cash.

Ultimately it’s much more fun making money with a group than on your own, and you can each own a fair share of the business and enjoy the success. The share should reflect the value of each person’s input into the business, be it in time, expertise, money or access to things that can make a difference.

You do need to protect your shareholding though the investment rounds. This means messing with contracts and clauses one you get investment, but get it right and keep it simple. Make sure there is approximate balance between inputs and shareholdings – and don’t be afraid to tweak early to avoid conflict later.

Avoid investments that come with too many strings, and especially avoid investments that ask you to pay the investors high fees for things like office space, advice, directors fees and so on before you can really afford them.

When it is time to exit you want to sell to the company or person that has the most to gain by buying you. You could be encroaching upon their space, or they may have a distribution network that can massively increase your sales and so your company value. You should always know who these potential purchasers are, and get to know them well before time.

Once you have had a serious offer then you are ‘in play’, and you want to try to create an auction situation where purchasers are bidding against each other. Hopefully you have a decent board and are getting good advice.

Finally at each stage, and you are investing by stage right, don’t be afraid to decide to stop. Not everyone creates Microsoft every time, and so it’s vital to recognise when the effort isn’t matching the potential reward and to exit gracefully. There are plenty more opportunities out there.