Founders, Pay Yourselves First

by Santosh

Santosh Dawara.

I occasionally get a cry for help in my inbox that goes something like this – “Hey there, I’m not sure if I’m going to last the next few months. I’ve got only 50k left over in the bank. I can’t build my venture out!”. It happens to the best** and there’s nothing wrong with desperation. And yet we know that it’s pitifully far from where we really should be going.

The answer may lie in a maxim I read recently, “Pay yourself first”*. The reason it sounds so out-of-place is that we’ve been encouraged to believe that somehow business people are greedy. On the other hand, the way a founder thinks will often determine how his startup will fail.

If you believe in capital first, fixed payouts, followed by payments to vendors, followed by pay the government, then pay yourself last – if your venture takes a tad longer to get off the ground then trust me, you could be writing an email just like this one.

If on the other hand, you believe that you will have to pay yourself first, there’s a chance that you will build a very different company, one where responsibility lies squarely where it should. Perhaps one that is both grounded as well as one that exceeds the wildest expectations of yourself, your investors, customers, employees and everyone else.

If you believe that founders that think this way don’t make it big – that’s simply not true. The most oft-cited examples are of, Each of them were making a couple of million annually before their second year of operation. What also needs to be mentioned is that one of them found a hugely successful business model a little later in its lifetime and promptly switched over to it. The Indian business climate blessed both and, both having made cash-flow milestones within the first years of operation. For sure, revenue-first never stunted the future size of your venture.

If you’re uncertain about ‘how’ or ‘if’ your venture will make revenue, that’s really a good thing because it’ll compel you to think about the outcome, about your position in the value chain. It will also help your prospective customers to be decisive. It reinforces the boundaries of your experiment so that you can distinguish between true success and failure.

If you’re certain that your venture isn’t destined for early revenue – also read as ‘we’re a media company’, that realization is important and a certain outcome of revenue-first thinking. You can then be sure to have to look for another source of cash-flow, or divi-up your resources for offering consulting, or services and integrate it into your venture.

The kind of thinking I’d like this post to shape is that of a founder being creative with both what he is personally capable of and what’s necessary but beyond him. If you must, think of it as a game where you rack up points. Markets have traditionally measured ventures by their ability to efficiently generate cash and it won’t be the same game if we gave up on that fundamental.

I recall a founder, close friend who gave in and licensed his technology out after much consideration. His buyer simply had access to the market while he didn’t. He shared that it had been an ’empowering’ choice. It had compelled him to acknowledge that his runway was limited and that he had to build out his own capacity to self-sustain. It certainly delays his dream but it was better than having to write that final email.

After having gotten to cash-flow, you’ll find that even though you’re not perfect (what of profit? what of margin?), your confidence is greater at being able to maneuver your venture towards those same ideals. I hope that email will read – ‘we’ve gotten this far and are trying to figure out how we can go from here …’. In essence, it’ll bless you with better compatibility with the unknown that all ventures face.

* “Rich Dad, Poor Dad” – Robert Kiyosaki (get it on your kindle, or with flipkart).
** Also see, “Ecomom, And a Grave Financial Error“.