Saving Money On Startups

Jason Calcanis has written a post with almost twenty ideas for saving money in a startup. I agree that keeping the costs down is a critical part of doing a startup right, both because it allows the founders to dilute less and because it creates the right culture for the long term.

There are several of Jason’s suggestions I’d like to second and talk about a bit.

Don’t buy a phone system. No one will use it. – I remember a startup that we helped to incubate back in 1999 at Flatiron that made the decision to give everyone cell phones instead of buying a phone system. Today, you don’t even need to do that. Everyone has a cell phone. Just make sure you get good cell reception in your office (if you have one). I wonder if there is a repeater that you could put into an office that works with all the major cell networks to ensure good coverage. The new cell phones that allow wifi phone calls like my t-mobile curve are also making that less of an issue. Jason suggests that you can save $500/year/person by avoiding a phone system. That can add up to a lot of money over time.

Rent out your extra space.
– Our portfolio company Targetspot looked long and hard for 3-4,000 square feet last year and could not find anything that worked in the price range they could afford. Instead they took 7,000 square feet and are subletting a bunch of offices and cubes to other startups. Their net rental cost is much lower as a result and they also get the benefit of collaboration between other entrepreneurs and developers. Etsy has done the same thing with Make Magazine and a small group from Burda Media. There are some downsides to this approach. You have to collect rent, if the startup world got really bad (like 2000/2001) you could end up with more space than you need and nobody to rent to, and you could end up with subtenants that you don’t get along with. But even with all these downsides, I think this is something startups should consider in markets where office space is tight and rents are high.

Outsource accounting and HR – As Jason says, this is a no brainer. Here in NYC, we generally recommend a company called Ambrose. They are a PEO. Your employees technically work for them and you pay them to run all HR (including salaries and benefits) for you. I think there are plenty of high quality PEOs to choose from and all startups should use one.

Don’t waste money on recruiters. – I can’t think of the last time one of our companies hired a recruiter. I am sure it’s happened and maybe recently, but it’s not something many of them do anymore. LinkedIn, in particular, has become an amazing way to recruit on the business side. There are times when it does make sense to hire a recruiter, particularly for a specific skill set that the company doesn’t have in its extended network. Those times seem to be fewer and farther between these days.

Really think about if you need that $15,000 a month PR firm. – There are some really good PR firms out there and if you can get one of them to work with your company, then it may be worth considering it. But a mediocre PR firm is not worth it for sure. I encourage our portfolio companies to hire a person inside the company to be an "evangelist". That job includes blogging actively, reading and commenting and linking to other blogs, reaching out to the media and industry analysts and gurus, going to conferences and events, and generally getting the word out. That person can be young and not particularly expensive, certainly nowhere near $15,000 a month. And they have two things that a PR firm cannot offer. They work for you and they represent your company exclusively.

And I’ll add one more cost saving idea because Jason asked people to do that.

Hire "utility infielders" in the early days – Hire people who can do many things in the early days of a company. Charles Smith at TACODA and Etsy and AT at Zynga both come to mind. They are people with a number of skills who have spent a long time in startups and can do everything and anything that’s required. You can’t afford to have specialists in a startup. Hire utility infielders.

#VC & Technology

Comments (Archived):

  1. chadrussell

    I really like the “evangelist” approach. Gary Vaynerchuk talked at FOWA about doing this (active blogging, participating in forums, adding content linking, etc…) but it can definitely consume a ton of your time. Being able to offload this to someone that works for you and does it practically full time would be wonderful.

  2. Steven Kane

    Amen. Its always smart for entrepreneurs to be parsimonious and for those who raise outside capital to “treat the money as if it were your own”.One nit, though:Its wicked INexpensive these days to get a phone system – no way does a company save $500/employee/month, no way.And its a dicey proposition to have employees using personal cel numbers as official company contact info. If nothing else, when employees leave, your company’s contacts will continue to call former employees, which can be messy indeed.And any decent attorney can cite doxens of reasons why you don’t want any employee’s personal communication hardware/software to be de facto company property — principlally because it is NOT company property.Any case, getting three lines from Verizon or Comcast costs $100-$120/month. Install costs are tiny, maybe $500. Staples now sells simple plug and play hardware from AT&T and Panasonic that expands to 8-16 locations and has extensions and voice mail boxes and digital assistant, everything a “phone system” is expected to provide. Total cost” $250-400 for the first “base” unit, then $100-$250 per extension unit. That is, total hardware cost (no installation labor or maintennace contract required), maybe $3000-$4000.So even if a company only lasts one year, thats a total cost is say $4000 for hardware and $2000 for lines. If the company only has ONE employee its cost $500/employee/month. If the company has ten employees, its $50/employee/month…

    1. fredwilson

      That’s not a nit steve, it’s a correction and it’s a good one.Thanksfred

    2. chadrussell

      There are also virtual PBX providers out now that can treat cell phones as extensions, while still retaining voice mail on the virtual PBX. So not only can your employee’s use their cell phone (or any other phone) without giving away their direct number, but they also can keep their “personal” voicemail on their cell and the business one on the virtual PBX. The only drawback is if they are doing outbound calling, in which their cell number will be revealed.

  3. Chris Yeh

    I can always tell when a marketer or entrepreneur doesn’t know what they’re doing if they insist on hiring a PR firm.There are times when you need a full-service PR firm, for example, if you’re a consumer/media startup that needs mainstream press. But it’s appropriate for few early-stage startups.I like the evangelist concept, but I think it is important for the founders/execs of any Web 2.0 startup to be active in the blogosphere themselves. It’s too easy to become insulated from reality.My own strategy is to supplement my own marketing experience with a few low-cost PR consultants to handle the smiling and dialing–they have the pre-existing relationships and know the media game. But I don’t end up paying $15K/month for PR “strategies” that are no more likely to work than my own ideas.Please note that there are plenty of PR firms that do a great job, and I happily recommend them when I think the fit is right, but bringing in a PR firm at the wrong time is unlikely to deliver a positive ROI. I don’t know about you, but I can think of a lot of things to do with $180,000!

    1. fredwilson

      ChrisI don’t think the evangelist should replace the CEO in the blog world. but they can make it easier for the CEO to be productive and efficient with their time spent on itfred

  4. ErikSchwartz

    Sales and customer support need phones. Hosted asterisk based PBX via VoIP is very cheap (way cheaper than cell phones) and very effective. Just add soft phoens and headsets and you’re a call center.Add “be somewhere cheap” we have ~1800 SF of space in Portland Maine, 14 foot ceilings, a wall of windows for $1500/month….and more…EVDO for people who travel.Go to conferences very selectively. Go where your customers are. We’re at Radio Ink magazine’s conference this week, not SXSW because radio stations and networks are one of our major customers. Web2.0 and SXSW are fun, but if your customers aren’t there, you probably shouldn’t be either.If you make work a fun energetic place to be people LIKE to work crazy hours.Hire interns. Sometimes you find a gem.Thrify white tileboard from home dept is $11 for a 4×8 sheet. Start ups live on white boards

    1. fredwilson

      ooh. this is going to be a great comment thread. i can feel it already. keep ’em coming.

  5. Daniel Haran

    Any thoughts on his advice to fire anyone that isn’t a workaholic?

    1. fredwilson

      I think that’s jason being jasonI’ve watched him in action over the years and I’ve never seen him do thatferd

  6. Dick Costolo

    The utility infielders comment is a good one, but i’d tweak it to refer to these people as stem cells. What’s the difference? Well, they can do many things in the early days of the company, but when you grow and it’s time to start having people specialize, these folks can do that and focus on one thing and lead an area or GM a business unit, etc.; whereas you think of utility infielders more as always utility infielders, if that makes sense.

  7. ErikSchwartz

    A few doing business in NYC specific ones…The E train and the Airtrain to JFK is $7, many times it’s faster than a cab too. Generally, subway not cab.I hesitate to mention this one because it’s harder to get a room than it used to be; pod hotel on 51st between 2nd and 3rd ( Clean rooms (albeit small) under $150 a night. Free wifi.

    1. NG

      I would personally hate to work in a place where they expect you to pull crazy hours and then skimp on the small stuff. In the grand scheme of travel costs, a $45 cab ride to JFK is not really going to move the needle. Of course as a management consultant, I am pretty spoiled ๐Ÿ™‚

      1. ErikSchwartz

        It’s a matter of culture, not necessarily moving the needle. I’m one of the founding team, I take the subway.Besides, if you’re cheap on the small stuff yourself you can splurge for the team on other stuff.

  8. dchase

    Fred – You might want to post a blog one of these days about PEO’s. I thought I was with it but this was the first I’d heard of them. I bet there are others who are similarly clueless. This was the single most useful bit of info from Jason and your posts as we practice most of what has been suggested but hadn’t been aware of PEOs.

  9. Paul Vallee

    At least half of this comment is pretty self-serving, since I own Pythian, but one other suggestion is to outsource database and systems infrastructure management to a company such as mine. We run MySQL infrastructure for about two dozen companies either in the startup phase or recently graduated out of it. Since we do this on a fractional FTE basis, if you need 24×7 coverage from an elite DBA and Sysadmin team – but only for 30 hours per month all told – this is the way to do it.Here’s the other half worth considering: virtual PBX services from a company such as GotVMail, which is actually a great client of ours that is out of the startup phase now to be sure.CheersPaul

  10. Jeremy Toeman

    I’m biased here, but I am in pretty violent disagreement with the recurring sentiment that PR firms are a waste of money. YES, traditional, old-school, “blast out a thousand press releases” PR firms are a throwaway of money. But firms who have done their homework on how to leverage bloggers, influencers, and social networks can be worth many times what they are being paid.For every “lucky” startup who’s received tons of coverage, I’ll show you dozens more who have tried the “No PR” approach and failed dismally.Furthermore, not everyone makes for a good evangelist, and trivializing that work is also, in my opinion, a huge mistake that good startups will avoid.

  11. howardlindzon

    i am now itching to start another company. consider yourself warned and first to be pitched because of this damn post

  12. Douglas Karr

    I was discussing this week with a PR professional that it be in their best interest to learn social networking technologies. As a consultant to the industry, I’m already seeing dollars moving from PR to social networking, SEO, etc. If the PR industry wishes to remain necessary, then they need to become experts in these areas as well.

  13. Don Jones

    Interesting that now we’re in an economic downturn, people get jazzed up about ways to save money. “Frugal is the new black.”

  14. Ed French

    The utility infielders idea is a great idea I don’t think I’ve seen anywhere else, thanks.I like it when startups find new ways of saving money- that’s great- but if I look back over my portfolio I think most of these things would’ve made, at best, a useful marginal difference. The big items of cost for my portfolio companies are always people and outsourced work. I’d rather put the emphasis on the CEO worrying about which bits of the value chain he should really be doing, about timing of key hires, timing of fundraising and buy vs. build decisions.

  15. Sri

    We save a ton of marketing bucks by leveraging our partner resources. In return to letting them share some publicity, we get to act bigger than we are and “project” power a lot further than we can by going it alone.Recently we set up an event where, by sharing credit with a magazine and a hotel/spa chain, we got lot of free publicity (both for event and brand) and got to host a bunch of people for free for more than 8 weeks. Had we done it alone, we would have paid something like 30,000 euros; but instead, our share has come to 2000 euros.In case you are wondering, we are a mass market consumer products company based in EU.

  16. stone

    Fred,I am on start-up #3 beginning on Monday. My last one was quite a bit larger than all of Jason’s combined. My first comment: I would never waste my time on such profound writings while I’m in the eye of the storm. Each start-up IMHO is a battle. You need a battle plan (a good idea) and a plan of attack (how are we going to achieve this plan?). Then, once we have both of these things we set out to hire the absolute best in the world to fill the key positions.Jason’s top 20 items cannot work for all types of companies. The more technologically sophisticated the business model/idea, the more you may need specialists. Specialists are sometimes hard to find. You need to use LinkedIn, Monster, referrals, etc. but sometimes you also need to use a recruiter. I’ve used them sparingly but if you need a world-class CTO with a certain upbringing, you can often exhaust your resources pretty quickly.One of the major *mistakes* I made in my last company, which was quite large, was my nearly unhealthy focus on small costs early on. We were absolutely strapped for cash, there’s no doubt. Even when we raised our series A & B ($19M in total) I still felt poor all the way through. I always felt poor and always felt scared. The last start-up was my first as CEO.When people now ask me what my key takeaway was from our big exit here’s what I say: Don’t be scared to invest in ideas that you know are right. Said another way: I let my disproportionate focus on costs affect the pace of success. We could have spent 5% more along the way and been 15% more successful. I’m sure of it.We will operate our next company with frugality but we will step on the gas earlier on when we know things are clicking and the signs of an exciting, scalable model are before us.

  17. charlie crystle

    Jason’s early statements about employees aren’t easy to simply pass over. He advocates abusing employees, and I just don’t subscribe to that and hope his readers and yours reject it. I was happy to see him cross out the workaholic and lifestyle statements. My people push when they need to, and they have balanced lives. Most of my employees are married. Most of them have kids. Not a single one has to worry about work getting in the way of family–family always comes first. They’ll get their work done–we all trust that and because of that fundamental understanding of how people live and work well, we do pretty well. If I could get 10% more producitivity out of employees by pushing them harder but lose their enjoyment of work and the balance we enable, I just wouldn’t do it. It’s not worth it. And we’re still rocking, with our three best sales months ever and 3 new products launching in the next three months. Even if people don’t love their work can love the company, and even if they don’t love the company, they can be a positive, effective force for the company. Every Super Bowl winner understands that. It’s the leadership and management that ultimately makes the difference.In the spirit of the post, though:–provide rich healthcare benefits. You never want employees worrying about having to pay outrageous health bills, losing their homes, etc. So cover them well.–…and have their backs. The more they know you’ve got their backs, the more loyal they’ll be, and the better work everyone will do. All of which leads to…–reduced turnover. the best businesses hire and retain great people. when things go poorly or are led poorly, good people leave. And turnover is expensive. –“utility infielders” are what we call “generalists”. It’s a tough job for them, because as the company matures and grows, you want more and more specialists. Generalists who are leaders we promote to leadership positions. Generalists who are not leaders get moved into specialist jobs, but it doesn’t always work out. –get the right phone system, not no phone system. If you have a sales and support department, you need phones, and a cell plan isn’t going to cut it. Nor will Skype. Why? Measurement. let’s not forget the important need to measure activity and manage based on gut: informed intution. The more information, the better the intuition. –rent: we pay 1700/month for 4000 sf. How? First, we’re in Lancaster, PA. Decent office space is double that cost, and premium space is only about 25% more. We’re in an old tobacco warehouse. Lancaster is 2.5 hours by train from NY, 1:15 from Philly and Baltimore, 1 hour from Newark and Wilmington, DE, and 1.5 hours from BWI and PHL, 2 hours from EWR, and 45 minutes from MDT, which gets you just about anywhere. Home values average $180k; my 2700sf house downtown cost 230k, and it’s a beautiful federalist built in 1895. –get a space where the utilities are paid. Yeah, so for that $1700/month our heat, a/c, AND electric is paid.

    1. fredwilson

      CharlieI hope you (or anyone else) think that I agree with Jason on his unfortunatestatement that you have to be a workaholic and lack work/life balance to bein a startup. I try very hard to make time for my family and I hope thatcomes across on this blog.I like your focus on retention and doing right by your employees. Reducingemplyee churn is great way to save money.Fred

      1. charlie crystle

        I think some people in the startup need that, and perhaps all for short periods of time. Leadership, perhaps. But not most employees. That’s just not a healthy way to build a company. But then again we’re not flipping, and maybe that’s teh difference; if you’re flipping you need to run at full speed all the time, pushing faster and harder than everyone else in your space. But I still think there’s a line. You wouldn’t work Kerri to the bone–she wouldn’t do as good a job, and you want to keep her around.

  18. Craig Plunkett

    Here’s your cellular amp solution:http://www.wirelessnetworkp…Doesn’t do iDEN phones, but unless you’re startup includes a field force like Kozmo did… Who cares!

  19. michael

    to be fair, jason wrote his initial piece on cost savings. but he unintentionally — i think — revealed a kind of truth that all the subsequent posts elsewhere picked up on: there is, and should absolutely be, a difference in pinching a penny and squeezing your employees.i’ve been in the trenches — in fact, with jason himself — and have seen first-hand what happens if and when this difference goes unaccounted. it’s not just untrue but dangerous to presume that the next person you hire is going to have the same joyously obsessive mentality to the company that the founders et alia have. indeed, the new fellow may be perfectly productive … but to see that person as a ‘slacker’ who wants ‘a life’ is not a reflection on the employee so much as the original team.(in a related vein, i read an excellent post here:…now, jason did clarify in his follow-up that he simply meant to say a start-up should hire people passionate about their work. that’s all well and fine, and hard to disagree with. but it still leaves wide open the idea of treating employees as any other resource to be maximized. what he writes is belied by how he writes it: that coffee maker shouldn’t be considered a ‘keep ’em in their seats’ ruse; it should be considered an example, among many, of a rewarding work environment.even if jason is hiring people who are smart & passionate about their work, those employees will, sooner or later, know the difference.

    1. michael

      i hasten to add that i not, as fred says, seen any evidence of intentional mistreatment. but it’s nonetheless vital to remark the difference i noted in my first paragraph.

    2. stone

      It’s also obvious that most of the employees that work for Jason or most other start-ups are not going to become multi-millionaires and a job is a job to many. Lots will start out being passionate but realize (after 18-24 months) that they are in the wrong place in the pecking order to benefit financially. I tried something different this time. I’m giving the first 20 employees (if allowed by accountant) founders stock. Then I make them reverse vest. It seems to be very well received thus far.

      1. charlie crystle

        good man.

  20. RepeaterStore

    We are a small start up retailing cellular repeaters (which is how I came to this page, searching for blogs for repeaters). For our toll-free number we use RingCentral, which costs us around $120 a month including calls. For that you get a number of lines, a VOIP line, forwarding to any telephone number, a fax number, 100 extensions, voicemail and a wealth of different answering rules. They also have cheaper plans for smaller companies – we started out on the $10 a month plan. All in all a pretty fantastic service.And there are repeater systems available for all US networks. A dual band repeater will cover every US network except Nextel, which require their own due to their unique networks. You can see more on our site http://www.repeaterstore.comSam

  21. tmorling

    Here’s another bit of advice for start-ups: Don’t hire a VP of Sales!!Bringing in new prospective customers from friends and family should be a job responsibility held by everyone n the company. The accountant, the developers, the CEO and the Board should all understand clearly the value proposition of the company and be able to articulate it effectively to anyone they meet. Everyone should be expected to bring in prospective customers and promote the brand in their circles of influence. Hire a business development consultant to set up basic infrastructure and process and then let everyone contribute to expanding the business.Hiring a VP of Sales is not only expensive but typically adds little real value. Further, it promotes the idea that new business is a “department” not a shared business process.The job function becomes necessary once you have territories, multiple channels, and a sale staff to manage. That should be around the $3-$5M revenue level. Until then, sale sis everyone’s job at a startup!

  22. DAR

    “Everyone has a cell phone. … Jason suggests that you can save $500/year/person by avoiding a phone system. That can add up to a lot of money over time.”Huh! I don’t know why, but a whole bunch of bloggers who I normally respect have come out on the wrong side of this one.Cell phone minutes cost money! So what Jason’s basically doing here is saying “push your phone bill expenses onto your employees”.That may not be illegal, it’s certainly immoral, in my opinion.Frankly, my take-away from Jason’s post is that Mahalo sounds like a pretty horrible place to work.

    1. fredwilson

      i wasn’t suggesting that you actually use the employee’s minutes. you can put your employees on a minute plan that is pretty cost effective. that’s what we do. and we pay for the minutes.

  23. Gregg Smith

    Great post and as a CFO is a quasi-startup (we are “starting up” a 15 year old healthcare business), one that I can relate to.Great ideas on:Cheap rent with plenty of space for corporate. Our clinics are in Class A office space (close to corporate business centers) but our Corporate office is in Class B. We spend the money where we generate the money.Recruiting fees–one I’m having to work hard on to get out of our “system”.Phones–we now need a centralized call center. I have my fingers crossed that our PBX/VOIP can handle robust call routing, reporting and call recording. Make the right decision early.Hire and keep great people–our best employees have worn more than one hat. Our 5th corporate hire was a temporary receptionist who we had to beg to work for us (she didn’t want to be tied down). She’s now managing a $3MM revenue clinic.Related…hire outside of your industry. Our best non-clinical employees have come out of retail and have been trained in high-touch customer service.I also agree with the PEO suggestion. Ours ( in Memphis handles our multi-state payroll issues, tax filings and basic HR. Tremendous resource for us (and not just an ADP payroll service).Also HR Related (and self serving)–wellness programs for a balanced and healthy lifestyle. This small front end investment pays dividends in 3-5 years and retains employees. A good health plan with wellness benefits is a must. Our health insurance broker handles most of the administration for us.I have to disagree with not hiring a VP of Sales. Ours has focused our sales staff like lasers and we are seeing tremendous results. We’ve standardized sales processes and budgets across 5 locations and have had a great, experienced leader taking charge of it. Best hire we made last year. I wish we had made it 2 years ago.Corporate cell phone plans save 8-10% on minutes and on hardware.Wireless data plans (for a laptop) pay for themselves the first time a heavy traveler stays 4 nights at a hotel that charges $20/day or signs up for airport wifi.

    1. Tony

      I wholeheartedly agree that the most important thing is to be penny smart when first starting out. However (and I am biased being a PR professional) I think its imperative to have a communications program in place. In the very beginning there are definitely costs that should be removed from the budget. I honestly cannot figure why building your public image would be one of them. A company that has a strong message across all fronts is far stronger and will yield more revenue than one that is inconsistent or confused.In fact, i would argue that an outside firm will not only provide value externally, but a good firm will also add value internally. As a company grows if they havenโ€™t established in black and white what their message is, it will only get worse. Eventually, you will have an organization that has problems talking to different departments, forget about communicating to the outside world.While it does make sense to impart these duties to someone internally, as Jason suggested, there is only one downfall that i can attest to from experience. That is simply “drinking the Kool-Aid.” In other words, because the individual is immersed in the culture and takes for granted what the organization does, they run the risk of not being able to explain the company’s function to those outside their industry. There comes a tipping point where they no longer think like the “consumer” or target audience that the product or service is intended to cater to. (Based on the comments of Douglaskar and Jeremy I’m sure they would agree that this mentality is vital in order to achieve response and generate sales)Ultimately, and again I admit bias, I think that the right firm should apply the old rules to the new medium. Further, if one were to invest in professional services that produced measurable results (website traffic, clips, new sales leads etc.) at the end of the day the services should have paid for themselves.Very stimulating topic by the way, and its been interesting for me to read what others think of PR professionals. Some of us are good guys you know ๐Ÿ™‚

    2. fredwilson

      Thanks. This is great advice

  24. A_T

    Fred-Thx for the nod (AT @ Zynga). Fastest way from 0-60 is with a couple hungry, smart “utility infielders” who can generate ideas AND solve problems.

  25. Tyler Willis

    Another option is to use a re-routing number service (such as GrandCentral) and forward to your employees cell phone. Much cheaper then getting lines installed, and you go in and change the forwarding number if an employee leaves.

    1. fredwilson

      Very nice idea. I like it. Does it eliminate cell phone charges for your employees?