Penny Wise Pound Foolish Essaytyper

Be Careful not to be Penny Wise, Pound Foolish

Justyn Howard, founder of Sprout Social has a blog post that he’s written about his experiences of migrating from scrappy tools to more efficient ones (i.e. Using Balsamiq instead of SnagIt, Website Optimizer over just Google Analytics and FTP).

It’s a great topic, his post is well written and given that he’s going through it right now in his startup it’s worth reading his point of view on the topic.

Here’s my take:

Penny Wise, Pound Foolish
There is a British saying I always loved, “penny wise, pound foolish.” I took it to mean, “making decisions with small amounts of money (pennies) that end up making bad sense for affecting larger amounts of money (pounds, as in Great British Pounds).” I thought of it as people who cut corners on small costs but paid dearly in terms of lost productivity on expensive staff. Penny wise, pound foolish. I love this saying and what it implies and I use it often. Startups often make this mistake.

I Love Scrappy
Don’t get me wrong, I do think an important sign from startups is their ability to keep a startup culture going for as long as possible and one sign of this in the early days is scrappiness. Those who are old enough will remember stories about Microsoft that even as it was going through explosive growth Bill Gates still flew economy and the parking lot was first come, first served. It was a sign of honor to see whose cars were closest to the entrance and whose were still there when you left. Andy Grove, for many years the CEO of Intel, famously sat out in an open plan office.

And you all know the stories of the companies that assemble their desks from spare plywood or old doors, working in the up-and-coming part of town rather than in the heart of the financial district where all the nice office are. It isn’t always necessary but it’s a mindset.

Like everything, I screwed this up in my first startup. I had come from a world where I was nearly a partner at Accenture before starting my first company. I was used to being allowed to fly business class and staying at nice hotels. Our first big institutional round of VC was $16.5 million and we seemed likely to raise another $40 million within the first 18 months of operations. So when I attended the Fortune CEO conference in Paris I stayed at the venue: George V (The Four Seasons) without much thought.

I took business class on the Eurostar over and justified it because I could get more work done on my computer at bigger tables. It was probably true, but I created the wrong mindset — the wrong culture. I was too much Accenture, not enough Startup. I always say that it takes 18 months to un-train a big company employee from their bad habits when they join a startup.

I changed that quickly when the market shifted and I had to lay off more than 80 people — many of whom were friends. We went “nuclear” and slimmed down to 33 people (yes, I know, still large by today’s standards but this was 2001), raised $10 million and we built a real company. I learned everything I know about startups in these lean years: 2001–2004. I felt like I had survived The Great Depression and I never wanted to go there again.

I started flying RyanAir or EasyJet (the European equivalents of Southwest Airlines) anywhere I went. If I did have to catch a British Airways flight I was in the back of the plane near the toilets. I frequently travelled to Frankfurt, Germany but found it much cheaper to stay 20 minutes south of the city in Neu Isenberg. Scrappiness became a badge of honor. It wasn’t enough to just stay in Neu Isenberg but I found a pizzeria that had rooms to rent above the restaurant for just 35 Euros / Night. They were clean and since when I travel I’m normally in my hotel at 11pm and out by 7am wasting money on hotels seemed stupid.

Our company developed a cost-conscious mentality. We switched offices to a cheap 1-year sublet of a company that had too much space during the dot-com boom. After a year we played hardball and said we’d move out unless they gave us 20% off of our already low price. They had no options and the truth was that I was willing to move in order to drive the costs down further. We were on a path to prove to investors we could be profitable and driving every penny out of our cost structure mattered.

Cost conscious is obviously how most companies start — or should start. I often advise young companies against the dangers of raising too much money too early in the company’s existence. I know from experience — it helps fuel the wrong culture and it is very hard to rebuild your culture once it is set.

Scrappy for Scrappiness Sake is Dumb
But Justyn’s post touched on a nerve with me because I do see people take the startup, scrappy culture thing too far and he hit the nail on the head in advising people to think about efficiency and not just scrappiness.

Once a company has raised $2–3 million dollars I often advise them to get an office manager. It seems like an extravagance but if the person also picks up scheduling travel, booking meetings, dealing with company admin and helping with basic accounting / financial tasks it can be a huge productivity boost. And this is especially important since the people who get sucked into this admin the most are the founders — the people who you most want focused on high-value tasks. I will quote one portfolio company CEO who said about his office manager, “Mark, this is the most important hire we made last year. I have freed up so much of my time to focus on the important stuff.”

Another area where founders sometimes spend too much time is accounting. In the scrappy phase it’s fun to be the person who set up QuickBooks and to watch every penny that goes out the door. After you start to grow, you can still watch every penny but your time is much better spent on finding new pennies to come into the business than splitting hairs on how to best establish your general ledger accounting codes.

Hire a part-time accounting clerk to do the data entry and prepare the monthly books. If you’re business has complicated accounting (like many ad network businesses) and if you’re raised enough money to warrant it — a great VP Finance is worth his/her weight in gold. Even better if he/she can double as a VP Operations & HR.

In his post, Justyn mostly speaks about the toolsets you use to manage your products and those are important, too. He’s right about the need to eventually get dedicated QA staff while not absolving programers of unit testing & usability testing.

Be Efficiently Scrappy, But Maintain your Startup Culture
In my own startup I went too far. I kept trying to drive costs down and started making stupid decisions. We attended a conference in France and I asked teammates to double-up on hotel rooms. I doubled-up, too, so I figured it was fair. My team wasn’t impressed and I think it had a bigger hit on morale than the cost benefits we got. They were fine traveling RyanAir and then having to bus an extra hour to get to the event but they wanted their own room to crash in late at night. A small refuge from a busy day of shaking hands and demo’ing products. And I should mention that many of my sales staff were in their 30’s, not 20’s so this made it harder.

When I travelled to Frankfurt, the hotel in Neu Isenberg wasn’t good enough — I pushed to stay in a place that was 30 Euros. I traveled out there with our then head of sales & operations (and my business partner) Stuart Lander. We stayed in the middle of January in a “hotel” that turned not to have showers in the room — you had to walk down the hall to a community shower. We literally had to walk outdoors in the snow to the shower alongside Turkish construction workers walking in leopard-print underwear. I can’t make this stuff up! I had reached bottom. I had pushed too far. It provided a funny life story but at the time it didn’t feel that way. I’m lucky that I had Stuart with me as proof that this really happened.

It seriously was a visceral turning point for me that we had pushed things too far.

You need to always think about the trade-off between making your most valuable assets (your highest impact people) more productive and maintaining your startup culture. There is no “right or wrong” as this will be a judgment call in each startup based on capital raised, stage of company, number of customers, complexity of your business, etc.

Some companies argue that having personal chefs allows their team members to stay more focused and productive on work, others believe it is an unnecessary extravagance and sets the wrong tone. I’m frankly not really sure on this one but each company needs to think about what messages they send with the decisions they make.

Having the wisdom of having swung the pendulum too far in either direction I now pay close attention to this with the companies with whom I now work as an investor or advisor. Constantly ask yourself whether you can improve productivity of your most important contributors by minor investments in other people, processes or tools. Whenever you approve new expenditures ask yourself, “will this be perceived as being too extravagant for the stage of our company?”

These are always judgment calls but erring in either direction is a mistake. Thank you, Justyn, for bringing up this important topic.

Photo courtesy of Pat Page via Flickr.

Is there a wrong way to save money? Maybe not, but there is a wise way to save.

Everyone loves saving money, cutting back, and reducing expenses. However, sometimes there is a tendency to focus on the wrong things. While you’re busy feeling good about reducing little costs here and there, every once in a while you neglect the larger picture. Here are some examples:

1. Saving money by not going to the doctor for regular check-ups (those $20 copayments can add up!) or taking the bare minimum health insurance plan, but having to pay a large sum in an emergency. (This goes for any necessary insurance, not just health.)

Banking Deal: Earn 1.55% APY on an FDIC-insured savings account at CIT Bank.

2. Saving money by taking advantage of tens of thousands of dollars in 0% credit card balance transfer offers to gain a few hundred dollars, but being offered a higher mortgage percentage rate because of the temporary decrease in your credit score, costing thousands.

3. Receiving the 15% discount for opening a store credit card, but paying the balance off slowly, adding interest fees (and possibly late fees).

4. Locating the gas station with the lowest gas prices, but driving 20 minutes out of the way to save $0.05 per gallon, or, looking for the lowest gas prices but buying a vehicle with poor gas-mileage.

5. Saving several hundred dollars by not hiring a tax accountant to review complicated situations, but later owing the IRS thousands in fees and penalties.

6. Downloading music illegally to save $15 per CD, but being sued by the RIAA for up to $150,000 per song and settling out of court for an undiscolsed sum.

7. Buying the least expensive clothing and shoes, but having to replace the wardrobe frequently because of poor quality.

8. Parking and “just running in” without feeding the meter a quarter, but returning to find a parking ticket attached to your windshield.

9. Spending hours completing online surveys or writing pay-per-posts for a few bucks each, while your time could be better spent improving skills to land a better job or developing a winning business plan.

10. Haggling for lower prices at a garage sale, but buying a new car to put in your own garage.

Got more?

Updated March 8, 2018 and originally published October 13, 2006.

About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by Luke Landes.

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