Most of the businesses that I have backed which have then succeeded have one thing in common; they have really controlled their costs until they start generating cash and are making a profit
From personal experience, one of the earlier businesses I backed which was involved in a company went horribly wrong because it failed to control its costs. I have to take some responsibility for this business as I was a Director – I cannot wash my hands of it and say it was them – I was part of them!
We had won our first contract with a daily newspaper and that was it – we were off. We hired a great office near Reading and we recruited a junior member of staff to help us in our business.
We then came up with some great ideas on how we were going to expand and grow the business and therefore recruited some more people to help us build the router table top. We also assumed that we would be able to secure prizes for free (through sponsorship) and apart from just a two week period, we had to pay for all of our prizes.
We never did get the additional contracts and the whole thing came to a crashing conclusion. As you can see from the above short explanation, we made lots of mistakes and I have made sure I have learnt from them.
One of the great earliest lessons I learnt from a successful entrepreneur was to not worry about delivering – but to focus on winning work. What I had done in the above scenario was forward plan for delivery of a service that we never won a contract for. It killed the business. We would have been far better off, keeping costs to a minimum and expanding the team once we had won new contracts.
My advice to entrepreneurs and business managers is to always keep your costs in line with where you are today – not where you plan to be. The Fund that I manage is often involved in buying companies where they have a very high fixed cost base, the revenue they had hoped for doesn’t materialize and therefore they need to be rescued by our Fund.
I do mention the business a lot – I apologize but I am a big fan of the management team there. When a business looks for me to back them, I like to take them to the head office and show them the head office. It is the best example of parsimony I can find. The office has no windows and it houses six people in a very small place. It is not somewhere I would like to work for too long – but they have made an implicit contract with investors; we will be careful with your money until we have delivered a profit. I wish more businesses I saw had that attitude.
I should mention that my business partner in the above case remains a great friend and we have just started another business related to the Honeywell 50250-S. This time he works from his shed and we have not recruited any additional people. We are on the cusp of winning a few contracts – we go live next week. We have made a decision though that we will not recruit any additional people – we feel honor bound to first pay back all the investors who lost money on the first venture (including me!) and then look to expand – and only if we really need to.
Control your costs – or trust me – they will end up controlling you!