Optimum investment for start-up enterprises

Written by Sanjay Anandaram | Updated: May 1 2010, 04:26am hrs
I dont think we can afford him is what I heard the founder and CEO of a start-up say last week. He was referring to a potential head of engineerings resume that had been sent across by a friend. The profile was terrific and seemed like the start-up could certainly benefit enormously from having the individual on board. The CEO, though, was very apprehensive that the candidate would be unaffordable. Being cost conscious and frugal was a practiced way with this CEO and his founding team. So, what is the CEO to do when he now needs experienced and specialised talent to help the organisation grow

While it is extremely hard to find a company that collapsed because it cut too much cost too fast, it is also hard to find a company that starved itself to anorexic success.

Every business needs a certain threshold level of investment to first establish itself (these could include building technology, acquiring facilities and infrastructure, acquiring customer, a certain market presence and so on) and then another injection of investment to grow and scale. The initial threshold level required by a company is a function of the market, competition and the quality of the initial team. To establish the initial value proposition in the market, the company has to be careful with its money and smart about how to deploy it. It must be frugal and leverage its relationships and resources to the maximum . As the company establishes its value proposition, the technology and infrastructure need revamping to handle growth, additions have to be made to the management team, increase in marketing spends and so on.

It is at this stage that the mindset of the CEO has to adjust to the changed circumstances of his/her company. Do I continue with the frugal approach and work my resources to the bone or do I spend money on aspects of my business that affect growth Do I spend money and make that business trip to meet customers and business partners or do I stay with email Do I spend money on hiring the best or do I make do with the less than satisfactory senior management Do I spend money on a marketing campaign or do I hope for viral messaging to take place Investors do not invest in a company so that you can return their money unspent after two years. Investors invest because they want to extract value out of the company theyve invested in. Value is created through value-generating activities. Value-generating activities include first and foremost, profitable sales and an increasing number of such sales. Whatever is necessary to achieve this end result must be invested in.

For example, investing in creating a top-notch sales team but being smart in their incentives is certainly a good idea. Being generous with stock options coupled with operational freedom and involvement in company decision-making can help attract a class of executives. In some cases, top-class talent can be lured by the vision of creating (without interference) the next great company; The CEOs passion, ability and vision to get the best for his company is put to test in such cases.

Sometimes, it becomes imperative to pay the individual higher than market rates. In such cases, there are trade-offs to be considered. What would be the incremental gain to the company by having such individuals on board What would be the downside of not having heavy hitting talent on your side What is gained by way of sales, market presence, ability to hire others, time and so on

If the incremental gains are more than incremental costs, then the decision must be taken in favour of investing. Mistakes will happen but the decision-making process must not change. There are far more examples of companies, especially in India, that have under-invested themselves to oblivion than there are of companies that have splurged and collapsed.

What do you think

Sanjay Anandaram is an advocate of entrepreneurship. Hes involved with Nasscom, TiE, IIM-B and INSEAD business school. He can be reached at sanjay@jumpstartup.net