Budgeting Helps Secure Longevity
Jim Rowan was a senior vice president of SunAmerica Inc. when he left to form a new company that would take the technology developed by Santa Monica-based Stamps.com and apply it to other business models. Rowan formed EncrypTix in November, initially as a Stamps.com subsidiary, and has since raised almost $36 million in investment funding and turned the company into an independent entity. Although he raised more capital than he had originally hoped to, Rowan has conserved cash during the start-up phase, a practice that he says not only helps the company in the long term but also builds trust with his investors. He was interviewed by freelance writer Karen E. Klein.
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We’ll be doing another round of funding in the next several months, and I want to have solid answers when I go back to our initial investors and they ask, “Hey Jim, what’d you do with the first round of money?” A lot of start-ups have forgotten the basics of conserving cash. Even the use of a term like “burn rate” makes it sound like blowing money is acceptable.
My philosophy is that there is no correlation between how much money you raise and how much you should spend. The key thing for a start-up is to develop a budget and put it like a stake in the ground, so you can measure against it. It’s not a ceiling, it’s not carved in stone, but you have to have something that’s a benchmark.
We started out with zero-based budgeting, meaning we started from scratch and looked at everything we would need from the ground up. We also put together a spending plan, including operating expenses and capital expenditures. We learned as we were going along, made revisions and presented the plan at our first board meeting.
Now, a few months later, we find that we’re spending less than we originally budgeted because things are working out differently than we anticipated in some areas.
I believe that the CEO has to live what he or she preaches when it comes to using capital wisely. You cannot be effective if you’re traveling lavishly--flying first-class and staying in expensive hotels--if you’re telling everyone else to travel coach and stay at Motel 6. That’s why our senior people follow the same policy and stay at the same level when traveling as everyone else does.
Our operating expenses--the vast majority of them--are approved directly by me or by our controller. It’s not a trust thing, but I want to know where we’re spending our money.
I know, when I send someone to New York, that they’re going to spend $250 a night on a hotel room. But I also know they can go to eat at the local deli rather than turning in an $80 room-service bill. So we stay in reasonable places, but we are also reasonable about our spending.
We all have the same office furniture too, including myself. We bought functional, modular furniture that was used but in good condition. There are no reserved parking spaces in our lot, and we all have the same benefit program. There are no company cars or country club memberships.
This process is not about raising money and living high on the hog for a year--it’s about building a company for the long term. Everyone from me to the receptionist has stock options, so they will all benefit if we’re successful.
Everybody here thinks like an owner. People are here to work and build value. We don’t do a lot of the things that the newer companies are doing, like ordering lunch and dinner for everyone every day. Our investors didn’t give us money to feed ourselves, they gave us money to build the company.
Likewise, we had a party to celebrate our company’s launch. We picked a fun, cool place and spent $16,000 for good food for 150 people, and everybody had a great time. Some companies now spend $100,000, $200,000 or up to $1 million for a launch party. I felt like we used some creativity and boosted morale without spending a lot to do it.
Office space is another big expense, and once you sign a five-year lease you have to live with it. It took us work and time to find this space, but we chose El Segundo because we can pay $1.80 a square foot and get a functional, well-located office where people can be productive.
And we didn’t spend $2.50 or $3 a square foot and get into a cost that can’t be reduced once you sign a lease.
One other thing I emphasize is negotiating price with my vendors. Whether it’s purchasing computer equipment or leasing the office space, often price is negotiable, so I always ask for a better price, whenever possible.
Of course, there are certain times when we have to buy the highest quality, or we’ll end up spending money correcting the problem down the road. EncrypTix is a company that will spend $10 million on its platform because we’ve picked up all the high-quality players.
But we see that as investing money versus just spending it. There are times when you can’t be cheap about spending--you have to be smart and sometimes that means paying a premium to get quality where you need it.
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AT A GLANCE
* Company: EncrypTix Inc.
* Owners: Investors include Stamps.com, American Express, Disney, SunAmerica and Paul Allen
* Nature of business: Internet delivery and storage of tickets, coupons and vouchers
* Location: 101 N. Sepulveda Blvd., Suite 150, El Segundo 90245
* Founded: 1999
* Employees: 100
* Web site: https://www.encryptix.com
* E-mail: jim@encryptix.com
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If your business can provide a lesson to other entrepreneurs, contact Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016 or at kklein6349@aol.com. Include your name, address and telephone number.
