You gotta spend money to make money. It’s a phrase so cliched that many a founder would roll their eyes at hearing it, but there is no getting around the fact that to get a million-dollar idea out there, you have to have some initial monetary firepower.
Economists and analysts have long studied how some businesses are able to to successfully leverage spending opportunities, while others haven’t seen as much growth. For example, when Deloitte crunched the numbers on more than 25,000 US companies between 1966 and 2010, it found businesses with strong revenue growth tend to have a specific mindset.
As Deloitte director Michael Raynor explains, truly successful businesses consistently make decisions based on future revenue, rather than cost reductions. These companies aren’t afraid to spend when necessary and are always focused on how they can sell more, rather than lowering their cost bases.
Even with this encouragement, deciding exactly how to invest within your business can be a tough process. We asked four entrepreneurs to share their largest or most significant business purchases — and what led their companies to decide it was the right time to splash the cash.
Spend on people first
Turmeric brand Golden Grind was only founded in 2016 but as the company approaches toddlerhood, spending on staffing has been critical, says co-founder Renwick Watts.
The company is a family affair, with Watts co-founding the brand with his wife Tahli Watts and her sister, WINK Models managing director Sage Greenwood.
“We decided early on, in the scheme of a self-funded business, to bring in a founder, Tahli, as a full-time operations manager and more recently Sammi to be our creative director, plus we now have a permanent arrangement with an experience businesses coach,” Watts says.
These three roles have been established over the past 12 months and Watts says they cost the business around $240,000 annually. However, making the decision early on to flesh out the team has been “imperative to growth, control and nurturing that the best possible decisions and actions are being made,” Watts says.
The business decided at the very beginning that if it didn’t build up a team quickly with the right skill set, it wouldn’t be able to achieve the growth it needed.
Every business will be different when it comes to making the decision to bring on more staff, says Watts, but Golden Grind knew it was time for its most important spending yet when it could prove there was work that needed to be done.
“Have enough workload there and ready to give, ensure your business is turning over enough profit to sustain, and be very specific with desired outcomes and uplift,” he recommends.
Seize the opportunity
Whether you’re spending thousands or millions, the best business purchases are made when you take action in the face of a good opportunity.
Freelancer chief executive Matt Barrie tells SmartCompany the biggest item he’s ever bought was an entire company: in 2015 Freelancer bought Escrow.com for $US7.5 million.
He says his company came across the opportunity for a “phenomenal” business and decided to pull the trigger.
At the time, Escrow.com was “a business doing US$430 million in turnover that facilitates the sales of anything of value such as fine art, jewellery, domain names, cars, boats, airplanes, or even $11 million dollar trips to the Aurora space station in 2021,” Barrie says.
Opportunities can also present themselves in the form of chances to build your company from the ground up. Entrepreneur Kyra Pybus is currently in the process of launching an international media-list app, connecting companies with the media individuals who might be able to tell their stories.
Pybus says she’s currently in talks with venture capitalists and is so far still investing both her time and own cash into the venture. The most important expense so far has been the $15,000 she’s used to self-finance a stint at a technology incubator in Berlin this month as part of the AusTrade landing pad program.
Pybus says the opportunity is a valuable one as her business looks to transform into a “media data company”.
“Austrade sees List Co. as a high potential startup, so the three-month accelerator will provide support for List Co. to scale up and enter new markets,” she tells SmartCompany.
There are plenty of costs involved in building an app-based business from the ground up, she says.
“The digital infrastructure of any development project is a huge financial undertaking and building an app with a development team is no small feat,” she says.
But Pybus explains investing in the Berlin trip will be a small price to pay to get expert support from a program without giving away equity in her company.
Spend with room to grow
Big spending decisions should also be made with long-term future needs in mind, says co-founder of fashion retail app ShopYou, Kelly Slessor.
Slessor says she and co-founder Emma Sharley have allocated around 70% of their overall business spend on user experience and the actual development of the app.
The undisclosed amount is the company’s largest expenditure to date, but the founders firmly believe it was critical to pour cash into researching not only the features of the app, but who was going to create.
They spent six months researching best practice for artificial intelligence integration for their platform, having won $125,000 in first-round funding through an Investible pitch competition in 2016. The pair then interviewed six global tech providers before deciding how the final product was going to be built.
“We assessed them based on their technology stack skills, data science capabilities (ability to develop the algorithms and the natural language processing components), user experience and most importantly their ability to future think,” Slessor explains.
It’s a long process getting to that initial launch stage, but this expenditure has been the most important for the business so far, Slessor says. You want to make sure your platform doesn’t become a “legacy system” the minute you launch it, so you want to build room for your product to last the distance.
“I see brands sinking millions of dollars into re-platforming based on five-year plans with no concept of what the next five years from a technology perspective looks like,” she says.
“We wanted to build a platform that had the ability to grow and develop around a shoppers changing needs.”