Navigating Startups Through Smart Investments, Outsourcing and Cash Preservation
As featured in TechCrunch
We often are taught that a company is only as good as its talent. While I’ve found this to be true, in recent years, investing in tech has become equally important. Every aspect of your business will be impacted by the technology you source and how you choose to incorporate it; from what solutions you OEM into your product to the tools you chose to drive efficiency, productivity and financial standing.
Saas and cloud software have drastically improved in terms of variety, quality and availability. But given today’s harsh economy and reduced VC spending, startups need a critical eye when purchasing Saas and cloud infrastructure. It would seem advantageous for startups to slow down investing in tech until the economy turns around, but investing in the right tech with the right financial strategy is the best choice you can make for your startup today.
Consider the economics of buying vs. building your stack
One of the biggest financial mistakes founders make is opting to build out their own technology as opposed to buying it. They are eager to reflect their own innovation and assume that having full control over their stack will fuel growth faster and more efficiently. They are financially biased thinking that avoiding spending on external vendors will save them money. In almost any industry, tech has advanced in such a way that building out your tech is not the fastest, most efficient option anymore – it’s actually the more expensive choice.
Especially when you are a small company operating on small volumes, the price to purchase OEM technology is fortunately small. External API’s are also easier to integrate because your platform may not be as complex and robust. So, instead of building out the entire stack from scratch, you can focus your efforts on building out the proprietary components that are truly unique to your business. For instance, at my current fintech company, I chose to OEM more than 10 platforms, and each provided 3x savings compared to building it out ourselves.
Tesla, who is known today to be manufacturing many of its car parts in its own factories, actually started by OEMing many of its components from external manufacturers, including traditional car related components, sensors and microchips for its autonomous driving, as well as batteries and open source capabilities for its robust software platform. It was only later on, when Tesla became a huge company, Elon Musk decided to bring many of the outsourced elements in-house. The moral of the story is don’t be mistakenly inspired when looking at “not invented here” type companies, like Google, Apple and Tesla. This is not necessarily where they started.
Take a bottom-up investment approach
As a CTO, I have always looked at my tech spend in two ways: how will this tech accelerate time to market? And how will this tech impact the overall efficiency of the company? We answered the first question when considering what tech to build versus OEM. As for the second question, here’s where we look at how investing in AI will improve performance for your workforce.
It’s a no-brainer that AI for workplace acceleration is here to stay. In a 2023 report, McKinsey claimed that “generative AI is poised to unleash the next wave of productivity.” We’re already seeing a boost in productivity among developers, who are known for their early adoption of AI through Github’s Co-pilot and similar tools, and we’re quickly seeing AI spread in influence across every job function, including sales, marketing, IT, HR, finance and more.
When purchasing AI-powered software or any other productivity tools, I recommend starting cheap and taking a bottom-up approach. CTO’s and founders have a tendency to take a top-down approach when influencing tech adoption for their company. Not only does this prove to be more expensive, it also ends up being an uphill battle when getting an entire company on board with new tech. Instead, try democratizing the process.
Throw out the idea that you know best as the executive and see what is working across your teams. Encourage curiosity and give them the means to try a handful of tools. Implement virtual corporate cards and remove purchasing process barriers for low cost subscriptions. Once they’ve used small budgets to test out options, you can make a larger investment in those solutions that have hit critical mass and try to save money with volume discounts offered by vendors.
Finance your software to preserve cash
When you have a good hold on what you want to purchase in terms of OEM and boosting productivity, it’s time to look at how you can still save cash. As the saying goes, “cash is king;” and unfortunately, too many CTOs are not paying close enough attention to the financial side of their tech spend, while CFOs find it hard to audit their decisions and rationalize the spend. Companies need to preserve as much cash as possible at every opportunity.
The first and easiest option to preserve cash is through negotiating better payment terms via the vendor. This is a simple way to delay spending large amounts of cash upfront. Too many startups, however, are coming up short because they fail to negotiate better terms.
It is not always their fault. Part of the challenge is that negotiating terms has recently become a much harder task in the tough economical environments. Vendors are putting much more focus on their ability to collect cash upfront and shorten their DSOs. Fortunately, to accommodate these challenges, startups have access to another option – software financing.
Traditionally, when companies made large hardware purchases they opted for leasing hardware to preserve cash. Today, the birth of software financing is the reincarnation of traditional hardware leasing. As investment in SaaS and cloud software skyrocket, there is a parallel rise in fintechs providing financing options. As consumers have grown accustomed to the Buy Now Pay Later purchasing trend, fintechs can create the same experience for B2B buyers. Startups can more easily preserve cash and pay later with modern software financing all in a matter of minutes.
Invest in tech, outsource what you can, and all the while, save cash
When you manage your tech spend you should do so from a few angles: What can you outsource? What can you purchase to make people more efficient? And, how can you preserve cash throughout the process? As a founder or CTO, you always want to stay current with the best tech, but first and foremost, you need to keep the company financially afloat. If you take the right approach, you can capitalize on everything the latest Saas and cloud software can provide. You can outsource with OEMs where needed. You can tap into AI to improve your workforce. And, you can finance every cost along the way to ensure cash remains king.