If you’re building a new, innovative product or launching a startup, chances are you do not have access to unlimited capital and resources to support turning your idea into a successful venture. Consequently, being adept at reducing the costs in your business is not only key, but many entrepreneurs even hold a great sense of pride in their ability to do so. The issue is, that while minimising costs is important, this alone will not result in your company growing to the height you may have set out for it. To best support you and propel your business to the next level, you need to learn how to be strategically selective with reducing or minimising costs. I use technology entrepreneurship as the primary example in this article, although the same principles apply to every industry.
At Engenesis Ventures, we run a program for business owners and startup entrepreneurs who are in the process of building their new technology product or service or are on the way to scaling their offering to new customers. A common issue raised by startups is the volume of capital they need to build their technology product; it is typically the number one highest ‘cost’ to get the business off the ground. Many entrepreneurs and business owners take the approach of “We only have a limited budget, and the cost must fit within it!” They respond to this issue by doing their best to reduce this cost to fit within their pre-existing budget. For example, they will speak to many software developers until they find one who seems capable of building their product at a price that fits the budget.
While the ‘shop-around-for-a-bargain’ approach can be effective for purchasing new shoes or finding a great deal on the latest gadget, it can lead to many hidden problems for the future of the business being built. These can range from choosing a low-cost development team that lacks the infrastructure to build a scalable company – in which case the software would likely need to be discarded at some stage – to partnering with a technology team unable to work with the founders to build their business long-term. If startup entrepreneurs can’t get the quote to fit their immediate budget, they may be discouraged from pursuing the venture at all and give up on their dream. Although these issues shouldn’t be ignored, the key point being made here, based on our experience at Engenesis Ventures, is that focusing on budgets and cost reduction alone will not drive a company to lift and scale.
What is an entrepreneur?
As part of the business training and transformational programs at Engenesis, we like to remind participants what entrepreneurship is and relate the definition to what they are trying to achieve. Jean-Baptiste Say, the French economist who first coined the word ‘entrepreneur’ in the 1800s, said, "The entrepreneur shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.” When we apply this definition to a technology startup, consider that the founders are bringing together resources, such as team members with critical technical skills and knowledge as well as domain, sales and marketing expertise, and using these resources to build a product that profoundly solves a burning pain for a group of human beings, also known as their market.
To demonstrate how this may relate to you as an entrepreneur managing your budgets and costs, let me contrast the above situation with a conversation we had with a founder of an Australian tech company who led his business to generate over $750 million in gross revenue. Engenesis Ventures was brought in to support the founder in assessing a new market opportunity. They were hyper-focused on growth, and even though they were a sizable company, they still approached new markets like a startup as they needed their capital to focus on existing operations. When we reviewed the costs of the technology build, the founder did not respond by saying, “This is our budget, and we must fit within it”, or asking, “Can we reduce the development cost?” Instead, he pulled out a scrap piece of paper and proceeded to scribble a few quick calculations on it in front of us. As he scribbled, he explained, “This is the number of customers we will need to have, and this is the profit we can expect for me to get the return I want.”
Three critical factors that outweigh budget and costs
While it makes sense to ensure costs are not exorbitant, highly effective entrepreneurs take far more into consideration than budget and cost alone – they look at the value they can create in society and what it will take to get there. In this particular situation, our team spent an intense three months of product and business design consultation with the founder’s team, which ultimately made it clear not to proceed down that market and illuminated other pathways for him to grow the business. The point is that the founder of this $750 million company was being an entrepreneur, not merely acting how he believed an entrepreneur should behave. He was assessing how he could pull together resources to produce higher productivity and yield. Naturally, there was some consideration of the budget, but it was in the context of creating value in the market and producing a return. By taking an entrepreneurial approach, the founder grew his company to the size it is today.
If you’re in the position of building a new technology product or making an investment in building or expanding your business, I invite you to consider the critical factors below:
- What is your core value proposition? You do not want to reduce costs simply for the sake of reducing them. You want to build clarity on the value you provide and eliminate anything not required to deliver on this value. For example, could you remove one or two features and leave them to a later version of your product?
- What is the potential revenue projection? How many customers would you need to earn back your investment? Is it feasible to obtain this number of customers with the resources at hand? If your projected revenues are too low, you may need to revisit your core value proposition and look for a deeper burning pain to solve, the solution for which you could potentially charge more.
- Break down your product roadmap into smaller horizons. Do you really need to build all the features you have listed in front of you? Or could you release a smaller number of features and have that bring in revenue, which could then fund the next stages of your product?
The above considerations and questions will support you to focus on being entrepreneurial instead of merely trying to meet budgets and reduce costs. If more startup entrepreneurs and business leaders adopted this approach, they would have the potential to create more significant returns for themselves and their teams, grow their industries and contribute to the broader community and humanity by creating genuine value and solving their markets’ burning pains.