Three Things To Put Off As Long As Possible For Your Startup

While there are often investments that should be made upfront, oftentimes new founders and new startups will waste money and time on things that they shouldn't.  I sure know I did during my first go-round.  Don't make my mistakes.  Here are three things you should put off as long as possible:

Don't incorporate until you're playing with Other People's Money.

There are two kinds of other people's money.  The first is Other People's Money - investment dollars from outside sources: friends, family, angels, VCs, certain grants, and so forth.  The second kind of other people's money is even more important - paying customers.  Any concern about your personal liability is misplaced; if your site has a bunch of Google AdSense ads, no one in their right mind is going to sue you.  You're going to need to be incorporated to deposit any investment (if you're so lucky) and you'll need to be incorporated to get an internet merchant account.  You can probably get by with a PayPal account (under the domain of the site; don't use your personal PayPal account) for a while, as well.  And don't worry about the intellectual property you create before incorporation; you can always assign it to the company later.  That's what Google did when they got their first check before they were even incorporated.  

Don't do any paid user acquisition until you can calculate your CAC and LTV.

It's very, very tempting to "experiment" and "test" various paid customer acquisition channels.  You start with AdWords, then do some cheapo banner ads on a couple of ad networks, and soon you're hooked on some hard affiliate stuff and paying thousands of dollars a month to an Outsourced Program Manager.  AdWords are a gateway drug to unprofitable user acquisition.  Only start throwing your dimes at paid acquisition when you're damn well sure your dimes-into-dollars machine is humming nicely.  And you only really know it's humming nicely until you have enough metrics around your unit economics - what your costs are to serve every new customer, and how much she's worth to you in revenue (if you're rigorous, gross profit).  These numbers have to come from real users using your real product; they cannot come from a financial model - that's just guessing.  Get hard data.  Then and only then can you think about customer acquisition channels that have direct costs above zero.  Until then, you're much better off engaging in inbound marketing - making remarkable content (you blog regularly, right?) and a remarkable product - and really thinking about your on-site SEO.  

Don't hire a PR agency, part-time sales force, or any other outside consultant.

You want to be focused on the product.  You get the market well from your industry background and you know you have your problem statement nailed from your in-depth customer development interviews.  You need to focus on building your product solution hypothesis and you just can't be bothered to do the legwork of developing relationships with bloggers, press, potential customers that you don't know, or potential business development partners.  You met some smooth business guy at some tech meetup who says he can do all this for you for a small amount of cash and equity.  Seems like a good deal, but it's not.  Managing someone who isn't a full-time employee and who isn't as invested in the company's success as you are is a path towards hurt feelings and wasted time, energy, and cash.  There are certainly times and places for help in all these matters, but pre-launch isn't it.  (The only exception is if you've raised millions of dollars in Other People's Money and you can afford to pivot your product, positioning, and or price if your big splash fails.)  You probably won't be as good as someone whose work life is dedicated to press, PR, sales, marketing, or whatever - but you're going to be a lot cheaper and you may not be all that bad at it yourself.  A passionate and articulate founder can go a long way - I was able to do all of this myself, getting into TechCrunch, landing new customers from cold-calling, and striking business development deals.  You can too.
32 responses
Good post. Staying focused on your product is essential.

My only disagreement is that I would change "don't incorporate..." to "incorporate when it saves you money." Incorporation can be a great tax vehicle for founders who face upfront expenses (even if we're just talking laptops, hosting and software). The key is you have to understand the tax law and how it will effect you. For people looking to raise money as soon as they can, the early writeoffs under a c-corp are probably not worth the time or filing fees (let alone the corporate taxes if you have early revenues); but for boostrappers who can file under subchapter S, the tax savings are enormous.

Incorporating may also insulate you personally from your company's liability. Is probably worth a few bucks consult an attorney depending upon type of business.
Thanks for this post. You earned a follower.

Question though. Other people (Tim Ferriss e.g. in 4 hr workweek) advocate using AdWords for market research even before your product is working or is MVP. Do you disagree entirely? Or is market research kind of an exception?

I have to disagree on the first point about incorporation, especially when talking about business that will seek investment. Waiting until you have investment to incorporate can have severe tax implications on the founders. The cost of incorporating is quite low relative to the problems that can be created by operating without incorporation. If you are not planning to seek investment AND if you are the only person creating IP, it may be OK to operate for a while unincorporated. If you are using any co-founder or consultant to create IP, you should be incorporated.

Matt Bartus
www.mattbartus.com

Being incorporated in CA costs at least $500/year. That's money that the state wants - it has nothing to do with the legal costs.

And no, you can't dodge this by incorporating in some other state or country. CA wants at least $500 from every corporation that is doing biz in the state.

I'm not sure I agree with #2 (or what to do going forward if I do accept it). One of the reasons my previous startup failed is because I just can't sell worth a damn. Going forward, I know that the viability of any startup I pursue (that actually creates a product instead of offers a service) is going to be dependent on finding someone to sell it for me.
Great points for start-ups, especially about advertising such as PPC. I have seen too many (myself included) get hooked on getting traffic from paid sources. From past experiences, it is much better to establish an organic base of acquiring customers before spending money on PPC or other online methods. After you have a foundation, you can integrate paid solutions so that they are truly measurable. At the end of the day, one of the most important lessons a start-up needs to learn is the "true" cost of acquiring a user.

To Robert Boyd's comment - I think market research can be considered different from the points mentioned in this blog. Although a blanket statement cannot be made about this point, as for some companies market research is the same as acquiring customers. I have read the 4 hour work week and if you are needing to help make decisions on directions to take the company from a marketing and branding perspective, doing paid testing can help speed up the decision. The point in this blog is to know that it can be addicting and if one is not careful they can expend a tremendous amount of available capital. In the beginning of any start-up we as entrepreneurs can be impatient to wait for user feedback and we look for ways to circumvent organic methods.

We have a motto at work, "always be testing." Everyday I want to make sure that we have not settled for one way of doing things as the best way. The user's ultimately decide what is best, and user's opinions, ways to interact, etc change over time. I suggest to friends who are starting companies that if they want to do PPC and other forms of online marketing, they set a strict budget. Before the budget is reached, they need to look for patterns of user behavior that can help the start-up make adjustments and understand the true cost of acquiring a user, and more importantly, keeping users engaged. Resist the temptation to convince yourself that if you just spend a little more money you will get a "better" idea.

I wish I had read this a couple years ago before I spent a ton of money on PPC to do "market research" for one of my start-ups. But as entrepreneurs, we live and learn; or we test, fail, and do it better the next time.

Right on with #3, when you outsource the job you outsource the tenacity. I'll take elbow grease, passion, and innovation over a cavalier and complacent skill set any day.
Can you elaborate a bit more as to why it's a bad idea to incorporate early? I was hoping for some more support to that argument.
Hi Sachin, good post and mostly agree on #2 and #3. As far as incorporation, it's definitely not necessary from day 1, or even day 100. But it can be valuable once things get "serious"- serious can be defined as a) you/cofounders quit your day jobs or turn down other opportunities, b) you get strong customer validation and decide to move forward, c) you fund-raise externally - not even being incorporated is going to look a bit amateurish and could give the investors more control than you want.
Sachin, I'm not sure if you also prepare your corporate tax returns and legal filings on your own. Yes, by devoting a tremendous amount of dedicated time and effort over an extended period, if a CEO has strong personal promotional talents he/she might successfully self-market a venture. However, for those entrepreneurs who do not have the time or natural communications skills required to publicize themselves, engaging outside PR expertise at the right time can jump start a start up's visibility and accelerate biz dev goals during the crucial launch phase.
I strongly disagree with the statement "And don't worry about the intellectual property you create before incorporation; you can always assign it to the company later. "

Now, if by "don't worry", you meant "don't pay a lawyer a bundle of money", I might be more inclined to agree.

If you have more than one founder, or if you any customers, or if you're building up a reputation, you need to at least think about IP.

What you do early on in the company can hugely affect the value of your IP later. For example, if you start offering a product or components of it early on, that starts a one year clock for patentability (Google for "on sale bar"). If you're building a business reputation under a name other than your own, you're establishing trademark rights. But picking the wrong name can a) expose you to *personal* liability for infringement or b) result in an un-protectable name, thus squandering all the goodwill you built up around the old name.

So, spending an hour or two with an IP attorney up front can save you a huge amount of pain down the road. The cost can be reasonable and you'll have a much better idea of what NOT to do as you go about building and promoting your product. A good attorney that focuses on startups will understand your financial situation and may reduce their rates or provide some limited free consultation initially.

(Mandatory Disclosure: The foregoing isn't legal advice, but is general legal information designed to inform the public on a topic of law. Consult an attorney for questions specific to your business.)

Right on with #3. You need to have your skin in the game: a product, a prototype, and the right vision. That could change as you're working on your product. I'd spend my marketing time building a message and networking within close friends first and worry about the big marketing spends later when you know you have something to show.
I think market research can be considered different from the points mentioned in this blog. Although a blanket statement cannot be made about this point, as for some companies market research is the same as acquiring customers. I have read the 4 hour work week and if you are needing to help make decisions on directions to take the company from a marketing and branding perspective, doing paid testing can help speed up the decision
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These numbers have to come from real users using your real product; they cannot come from a financial model - that's just guessing. Get hard data. Then and only then can you think about customer acquisition channels that have direct costs
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