830,000% ROI

April 17, 2011

We often think of Start-ups as "penny-pinching, cheap rent, used furniture" organizations that need to scrimp and save to meet their next payroll. This is often true, especially in their very early stage.  A few weeks ago, I heard a presentation by Brian NeSmith, the Chief Products Officer of Blue Coat Systems. He said that to a Start-up, "Revenue is like air. If you don't have it, you die". Start-ups begin with a full tank of air based on the cash they have available and their tolerance for sweat equity. Once this air tank is empty, unless they find new investment or product revenue to refill their tank, they are dead.

Given this, is it any surprise that Start-ups are cheap?

So when a client offered me a coffee from their $2,500 espresso machine, he joked about the discussion he had had with his co-founder about this expense when they bought it two years ago. He had not been in favour of the purchase. Then he told me that in the last two years the espresso machine has served 30,000 cups of coffee in lieu of employees leaving the office and walking over to the local Starbucks.  Being two analytics, we quickly sketched out the ROI of the Espresso machine and figured it was over 830,000% in two years. Not a bad ROI.

So this is a cute story, but what is the real message here.

Companies need to gain revenue to survive. Companies also need to spend to survive. It is what you spend money on that makes the difference. Being naturally risk adverse myself, I admire entrepreneurs that take chances and do things that cause their brand and company to cast a bigger shadows in their market than may be deserved. Marc Benioff talks of the very early days of Salesforce.com in his book "Behind the Cloud", when they hired actors to demonstrate outside of Siebel's user conference, carrying signs with the Salesforce's No Software logo on them. It would be easy to argue that Salesforce had better things to spend their limited resources on but these bold actions launched them into the minds of thousands of future customers.

I love the noise in the market that Stein and Debow are making with their company Rypple as the savior of the flawed employee performance process. I admire young entrepreneurs like Kunal Gupta of Polar Mobile who, when early in the company's history, while light on cash reserves, got on a plane to the US and declared that he is not coming back until he had a customer; or Harpaul Sambhi of Careerify, who spent $10,000 that he probably didn't have, to fly San Francisco and attend Taleo's partner fair at their Global Sales Conference and came back with a solidified strategic partnership.  None of these activities easily calculate into a ROI. Nevertheless, each one is critical to the development of a company. Not even the 830,000% ROI espresso machine would have been easy to calculate in advance.


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