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An Ode to Frugality

May 4, 2017

Frugality includes all the other virtues – Cicero

God created me to realize my vision on a shoe string budget… not to be cheap, stingy, or miserly… but clever in the application of resource. Frugality is the genius of accomplishing much with little. In remembrance of my Calvinist upbringing, I can make a penny weep tiny copper tears as my nimble fingers stretch its shiny orb to cover a heaven of needs.

I cash starved BluPanda for years, raising only enough capital each month to pay the bills, with nothing left over for new hires. I got the idea from my children, who are what I call cash-insentitive. If I give them $20, they spend it, but if I give them $50, they spend it. I think that startup companies operate the same way. If you give them cash, they’ll find some way to spend it and each additional dollar is spent with decreasing wisdom… a sort of decreasing marginal utility of cash.

My theory is that entrepreneurs should only raise as much cash as they can responsibly spend (which is often less than they think that they need) and should measure their own early-stage performance like gas mileage or a golf score: the ratio of progress to cash. But we rarely seem to do that. The thirst for more capital is real and intense and sometimes silly, and makes me wonder when the size of a man’s… uh, capital raise…  became the early stage measure of success. Cash is entrepreneurial coke. We raise more cash so that we can hire more people so that we can raise more cash so that we can hire more people. Wheeeee!

Ironically, we live in an era in which capital is less necessary than ever before. When I look at my income statement, I see lots of small operating costs that used to be large capital expenditures coupled with ongoing staffing costs. I remember spending $500K to build a small server room for a company that I ran in the late 90’s, then staffed that server room with something like 9 FTE’s. Now, I spend about $500 per month on Amazon Web Services. Wow.

Digitally-enabled cost savings aren’t limited to hardware, they creep right into staffing and operational efficiency.  Free digital platforms like Youtube, Hubspot, and WordPress (plug: I have a new Management Automation blog coming soon!) are my marketing department. I can create and distribute video presentations and educational posts to prospects and clients all by myself. With these tools, I can do the same work that once required a five-person department in my prior company.

My genetic disposition toward frugality has become a fanatical obsession with the elimination of capital expenditures and a general abhorrence of hiring. Our most expensive assets are laptops, and our entire production and delivery platform is low-cost, and cloud-based. Each time that we thought about hiring another person, we either adopted a free or low-cost technology, like Hubspot, or we pushed non-core work off to lower-cost, more capable third-parties, often in our customers’ organizations.

As a result of all of these free or low-cost substitutes for capital expenses and / or avoided hires, BluPanda’s cost structure is dominated by personnel costs, those personnel costs are quite small and they haven’t grown much over time. We are now beginning to scale into the market and noted a significant additional advantage stemming from our frugality: leveraging technology solutions has made BluPanda a far more scalable organization than a labor-driven organization would have been. We have high operating leverage, meaning that many of our costs are relatively fixed as revenue grows, the very thing you need to achieve margin growth.

We tout small teams because they avoid cost, but small teams have an important secondary benefit: they are more cost efficient than large teams. Fewer people mean fewer meetings. Fewer meetings mean more actual work gets done because less time is needed to coordinate. I can’t begin to estimate the number of meeting-hours that we have avoided by keeping our team small long past the point where we were expected to hire more people.

For example, at BluPanda, we have design meetings that we call White Boards. They’re limited to three people and focus on three things: (1) maintaining a consistent product / market fit, (2) pounding out new product designs, and (3) creating the corresponding marketing materials. It’s a beautiful example of Organizational Minimalism.

The cost of coordination, i.e. meetings, are margin killers. The cost of keeping people on the same page increases non-linearly with the number of people on the team. Entrepreneur.com posted an article called, “The Science Behind Why Small Teams Work More Productively,” the meat of which is about the number of communications links that exist on a team of N people. Quoting the late Harvard  psychologist J. Richard Hackman that, “Big meetings usually wind up wasting everybody’s time,” the article goes on to point out that the number of communication links among a team of N members equals N (N -1) /2. It’s non-linear. The article posits that management can be viewed as the work required to handle all of these links. Intuitively and mathematically, smaller teams mean less time spent managing work flow, more time spent generating output, and less cost per unit output as management costs are reduced.

In addition to keeping our own team small, BluPanda has excelled at pushing large portions of our workflow into external organizations who are better at it and less expensive than we are. One of our primary missions is to bring Management Automation to any hospital, anywhere in the world, yet we lacked any real connection to hospitals outside our immediate circle. Rather than taking on this job ourselves, we began working with the US Commercial Service, a group within the Commerce Department, that markets US companies to prospective foreign partners and clients through their offices in 75 countries around the world. Last year, they helped BluPanda to identify a French co-development and co-marketing partner to help us to enter the French market. This year, they are helping us to market in Brazil, Austria, and the Nordic Countries. So far, their total fees have been $400. Yep.

My genetic obsession with frugality aside, I began to develop these organizational strategies during our Competitive Strategy course with Pierre Azoulay and Scott Stern. One of the course papers was entitled, “Creating Competitive Advantage,” which analyzed the relative economic performance within several industries. I was struck by the following quote, which I now hold as Gospel, “A firm is said to have a competitive advantage over its rivals if it has driven a wide wedge between the willingness to pay it generates among buyers and the costs that it incurs – indeed a wider wedge than its competitors have achieved.” 

BluPanda’s variation on the second half of this theme, the costs that we incur, has been to search for and to choose wherever possible low-cost, highly scalable alternatives. We take an entrepreneur’s view of constructing a startup company’s strategy by searching for advantageous options in each of the segments of  the value chain in which our firm participates and sometimes pushing activities upstream or downstream when they can be more efficiently delivered by others. “Creating Competitive Advantage” as well as excerpts from the book, “Economics of Strategy” impressed upon me the notion that a start-up firm purchases its strategy by paying the costs associated with each choice, as represented in the expense portion of its income statement. Targeting choices that are both low-cost and highly scalable leads to a cost structure that grows as little as possible with revenues.

Our pursuit of frugality made frugality itself a strategy, akin to Walmart’s pursuit of ever-lower prices. What started as Calvinist waste-not, want-not philosophy led BluPanda to an unexpected Global Strategy that I will discuss in a future post. The resulting capital efficiency also led us to stay with angel financing long after the Friends and Family round . All of BluPanda’s capital has come from angels,  primarily physician leaders who helped to shape our products and introduced us to visionary customers. BluPanda will likely achieve profitability without raising a dollar of venture financing.

Frugality includes all the other strategies.

-R.

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