A Culture of Spending in Start-Ups

One of my start-up clients recently closed their doors after running out of cash, leaving employees without final paychecks and hard-working vendors holding the bag with unpaid invoices. Investors had pumped nearly a million dollars in cash and in-kind services into the venture, which had developed a promising technology platform.

The principals in the start-up spent their investors’ money in ways which certainly would raise eyebrows even in established, profitable companies. There’s a lesson here for anyone contemplating investing, working with, or supplying services to a new venture. “Control parties of a start-up are considered to work in a fiduciary capacity on behalf of their investors and customers. The fiduciary duty carries with it the implication that funds will not be spent in an extravagant or unreasonable manner. In the 2012 review of this client’s credit card and travel expenses, extravagant meal, hotel and limousine costs were noted, and personal costs which were not reimbursed by the employee were also noted on hotel bills. This continues to be a pervasive issue for control parties of start-ups.”

If you’re considering investing in or going to work for a new venture, look closely at the culture of spending – by both the company as well as the personal habits of the persons controlling the purse strings. Demand accountability and controls over “lifestyle spending” not directly driving corporate goals. Your money and time may be spent on trinkets and bravado that have nothing to do with building a profitable company.

While working with Walmart executives and vendors on various marketing initiatives from 2006 to 2009, I learned how much money is wasted by their competitors simply by observing the Walmart corporate culture of squeezing the most out of a dollar, while passing the savings onto customers and investors. A favorite story re-told to me about Sam Walton was about his policy of requiring associates to turn in old pencils before issuing a new one, if only to ensure the most life was squeezed from its graphite contents. While we might smirk about the pencil story, it is a lesson worth considering if you’re involved with a start-up.