Building a tech business from the ground up is a tremendous effort that can take some serious cash. Often, however, tech companies staffed with talented devs and businesspeople fall into a few of the same pitfalls — even if they have enough money to succeed. They may fail to invest in essentials or allow certain expenses to overtake what really matters.
These are a few of the right and wrong investments for any tech business, and how you can prioritize your spending for success.
The Right Investments
If you want to increase your cash flow, consider some of these worthwhile investments.
1. Database and Hosting
Database and hosting can quickly become one of the biggest expenses for a company, especially for those with an SaaS model. It may be possible for you to run your own database in-house rather than rely on cloud-based hosting in the beginning. As your business grows, however, this setup may become less practical.
Investing in a database solution and cloud hosting from the start can help you scale your business. It can also reduce the risk that you underspend on storage and compute power, putting yourself in a position where you can't handle growing customer demand.
2. Payroll and Accounting
Tech businesses, especially startups, often try to trim their budget by doing bookkeeping in-house. While this may seem like a simple way to free up extra cash, it's more likely to cost you in the long-run.
Payroll automation software will help you reduce the labor needed to pay your staff and stay on top of income reporting and taxes. A skilled accountant can help you in a variety of ways — by filing federal and state taxes, finding deductions and minimizing business costs.
When you shell out for payroll and accounting professionals, you'll sleep more soundly and potentially save money by avoiding costly errors.
3. Travel and Transportation
It's possible to spend too much on travel, but tech startups can underspend, too. Companies — especially those with remote teams — can fail to budget the money needed to bring staff together for events, expos and meetings with investors.
Finding a travel agent and renting or purchasing transportation will help you prepare for these costs if you haven't already. Investing in the right cargo van or finding discounts on air travel may not be as exciting as getting new tech. However, both can be essential if you want to transport staff and equipment.
The Wrong Investments
You've seen which investments can boost your business. Which ones should you avoid — or put on hold until your organization grows?
1. Overzealous Sales and Marketing Spend
Sales and marketing spend are essential — but many tech businesses do too much, too soon. You can run into serious problems by investing in marketing material long before your product hits shelves. Campaigns that begin long before your launch date can be ineffective, as it's not uncommon for the scope of a project or target audience to shift during development.
It may be a good idea to experiment with advertising during product development. You should hold off on big campaigns, however, until you launch your product.
2. Non-Core Product Features
Many new tech companies fall victim to scope creep. During development, their product's feature list quickly becomes bloated as the dev team and leadership — wanting to build the best item possible — try to do everything. At this point, dev costs can start to eat into other areas of the budget. A business may run out of money for travel, legal, sales and marketing. When it's time to grow, there's no cash on hand to do so.
Scope creep can hurt product quality. A tool that tries to meet every need can be unfocused and confusing to users. It can also lead to your dev team failing to implement essential features. In a worst-case scenario, your product may never reach actualization.
The best time to include additional features is after your product hits the market. Customer feedback will be more extensive and diverse than internal criticism. These requests and complaints will help you identify where your product needs to go and avoid spending on features that aren't wanted.
Before then, you should actively work to combat scope creep. Always keep the minimum viable product in mind. Encourage developer discipline and lock down spending on non-essential features. Remember that you can always add on in later versions.
How Tech Businesses Can Pick Effective Investments
As your business grows, you'll need to make decisions about how to handle increasing income and expenses. It's not unusual for tech companies, even if people with serious business experience head them, to make a few mistakes. Some try to manage bookkeeping and payroll by themselves, while others allow scope creep to eat into their budget for marketing and travel. If you want to manage your company effectively, prioritize the costs that matter — like hosting, accounting and event travel.