Startup Mistake Series –
War Stories From A Seasoned CEO
Control Your Money and Resources

By Bob Norton

It always amazes me how much waste there can be in a big company because people don’t consider it their own money. I have worked in both large and small companies, but I always tried to ask myself “would I pay this personally” before I signed a check or a P.O. for the company.

Once I was acting as President at a small startup which was spending money at a rate of over $350K per month when I arrived, and did not yet have any sales, marketing or operations staff. Virtually everything was going towards product development, with virtually no expertise in house on anything else to divert resources there. The founders where both very bright technical people and built a huge development group, just like the one they had back at their former big company. This proved to be the company’s downfall when combined with market factors, because all the money was spent assuming more would be easy to get later. However, this was not their fault really. The novice investors running the incubator allowed them to run the company and decided not to bring in a CEO until about 90% of their investment had already been spent. This proved to be penny wise and pound foolish as the CEOs salary would have been a small fraction of the wasted money. Even a part-time CEO could have averted this disaster easily during the first 18 months.

Example #1 – The Legal Contract

One of the biggest faux pauxs I discovered was an out of control “let someone else do it attitude”. This is where people do nothing except try to “manage” it. However, in their mind managing it is paying someone else to do it so they don’t have to, and so they have no real liability for any failure and effectively make no real value contribution. They just do nothing so they can blame it on the third party.

One great example was where the company needed a legal contract pulled together for its enterprise software license. The operations manager, who spent most of his career in big companies, did just what he would have done there. Called a lawyer to get a contract drawn up from scratch. Unfortunately with no in-house counsel who was motivated to do it in minimum time, it was sent to the outside law firm with the exact opposite motivation.

By the time we saw the first legal bill for this contract, it had been drafted from scratch, edited, circulated around the firm to four different lawyers without consulting the client and the bill was over $15,000. The fact of the matter was that very similar contracts where available for free at a large number of enterprise software company web sites to copy and then edit in some customizations we needed. This would have been the “startup” way to do it. Of course, we would have gotten a good legal review too, but the bill would have been ten percent of what was spent in this instance.

Now this process MIGHT be OK for a large company where the contract cost would be spread over many hundreds, or even thousands of customers, and where the liability was therefore fairly high, but this company’s entire business model was in flux and it expected no more than two customers in the next quarter. This document was guaranteed to change at least every quarter for the next year as the business model evolved so in essence was wasted effort. Obviously no one understood the real risk-reward-cost ratios here.

So the liability on this contract, essentially for beta testing purposes, was very minimal really. The software would not even run in a production capacity for many months. Everyone knew these facts, but they did not really think about it, or adjust their standard way of doing things based on this knowledge. So this document was made “perfect” at a cost far exceeding any possible benefit.

Of course, I am not advising against getting good legal advice, nothing can pay such great dividends when done right, but I am saying you need to put parameters of maximum costs around every task any vendor takes on and pick your vendors carefully. In this case a document taken from any enterprise software company web site edited down for simplicity (which should invalidate any practical copyright issues) and then reviewed by a medium level attorney should have cost well under $1,500.

What was surprising to me was that this law firm claimed to be a “real startup company type firm”. Which they sometimes were with the right partner or associate. When confronted the senior partner who billed it, defended the bill to the death. She claimed that this was “necessary” and that the five attorneys who participated all “looked at different things”.

Well somewhere in that firm I know there are people who know what a startup is, but the people who worked on this contract clearly didn’t have a clue. In my opinion they should not be allowed to do any further work for the company unless they admit their mistake (after this explanation) and heavily discount that bill, or even forgive it completely as a massive mistake on their part! They just don’t “get it”.

Of course, in the end the person who allowed the law firm to go wild must accept some responsibility too. And I would recommend the same outcome. If they see their mistake, think through it and adjust how they do things in the future then that’s great, lesson learned and lets move on. If they don’t they better find a job at a big company fast, because they might even bring down a startup if that type philosophy permeates the organization. I always recommend that no less than 50% of senior managers have strong startup experience and can bring out their own trash if necessary.