Money doesn’t matter when it comes to the success of your startup. What’s more important is your ability to stay on your toes and be nimble.
If you’ve been in the startup world for over a month, you’ve probably heard the terms “iterate” and “pivot” tossed around liberally. Are they more than just mere buzzwords?
Now let us tell you a problem. Many founders fail to execute upon these terms. And they just go with their idea, stick with it, then when a crucial moment appears in their business when they have to actually pivot… They don’t. And then the business fails.
Because if you create a structured organization, to begin with, then your company doesn’t have the bandwidth to pivot on a whim.
In our experience, we have found that many founders — while they want their companies to be flexible — neglect building in flexibility from the beginning. While changing or modifying a core product is commonly required, doing so is easier said than done. It’s hard to build a business in a way that allows for turning on a dime.
These 2 tips are here to help your company stay flexible without sacrificing growth:
1. Employ Variable Cost Structures
“It takes money to make money,” as the adage goes.
Most people take this advice to heart. They go out there on day one and start looking for a huge investor to back their idea. And even though it rings true that money is required to make money, it doesn’t mean that is the first thing you should be looking for.
If you take this approach, chances are, you will find it quite difficult to even get your business off the ground, to begin with. Your goal should be to have a big payday down the line, not today.
For most businesses, starting with this philosophy is the opposite approach that they are used to.
If you want to succeed, you can’t be chasing down your next investor. Instead, you need to be integrating variable cost structures into your business model during the early stages. While this strategy may come at the expense of initial profitability, we believe in being “long-term greedy” and have found that flexibility is more important than initial profits.
Startups frequently use fixed cost structures with the hope that incurring these expenses will free up incremental revenue. This is true during the good times, as fixed cost structures are more profitable than variable ones. However, more often than not, startups are facing some sort of turbulence as opposed to smooth sailing, and fixed costs can often magnify this turmoil. Imagine having an overhead of $10,000 a month and only bringing in $5,000 for the month in revenue. That could flip your business upside down.
Variable cost structures help mitigate risk. For instance, if your company designs apparel, consider a platform like Maker’s Row that connects startups with small batch manufacturers instead of immediately investing in the machinery — or a big order — yourself. If your product doesn’t sell, you can easily decrease production without huge losses.
If your designs prove popular and your business model sustainable, you then can purchase your own machinery and then capitalize on the benefits of fixed costs.
2. Less Money Can Mean More Flexibility
The more money the better, right? Not so fast.
More money might sound and feel better, but it may mean you’ll be forced to grow your company prematurely. Do you remember Groupon? They went and expanded across the world, setting up sales teams everywhere. Now, people hardly use them. That’s because they grew prematurely. Take the least amount of money required to help find your earliest customers and tune your product.
Most entrepreneurs think raising a lot of capital is a means of gaining flexibility, but we’ve seen the pipe dream of hefty funding and a large valuation trap many founders during the early stages. That usually leads to doom and gloom instead of a successful and thriving business.
With a large valuation, the pressure of iterating and pivoting increases exponentially as you now must balance tweaking your product with driving revenue and appeasing investors. But this is a catch-22, as your underdeveloped product won’t be able to drive your business’ revenue or meet investors’ expectations. Ultimately, the more you raise, the more beholden you become to external pressures, and the less likely you’ll be to iterate or pivot when needed. So stay nimble.
It’s no surprise that building a startup is a long, complicated road where there are many wrong turns and dead ends.
Iterations and pivots — we learned the hard way — are inevitable parts of building a business and can stump even the most qualified entrepreneur. Fortunately, utilizing variable cost structures and being realistic with funding needs in the beginning can help your company avoid these potential roadblocks.
So make sure to employ a variable cost structure and delay funding for as long as you can.