Wed. Jun 29th, 2022
Startups

Each year in the United States, according to Small Business Administration estimates, more than 627,000 new businesses open, and about 595,000 businesses close; only around 51% of new businesses last as long as five years.(1) The investment community has some thoughts as to why this is so. “A major factor in startup failures,” says Paul Ford, Founder and President of DS9 Capital, “is lack of profitability; most likely due to the cost overrun of salaries.”

A major cost overrun item in many startups, says Ford, is salaries. A platform-based infrastructure, for example, in which a startup buys services such as IT development from a contracting company rather than hiring a chief technology officer and an in-house staff, is, Ford says, a viable formula for a startup. This, he suggests, both protects profitability and provides the firm with education it will need when, later, it opens its own IT department.

The most successful startups, says Ford, based on the experiences of his own investment company, concentrate on profitability: making a return on investment, saving money where possible, and building a strong foundation with a sturdy, well-knit workforce. However, to successfully lead a company, one cannot behave solely as a boss—you order, and others obey. Behaving as a coach will lead to success, better team cohesion and morale, notes Ford.

He cites the example of basketball star Draymond Green of the Golden State Warriors, one of the leaders in an emerging trend in the NBA of players capable of playing and defending multiple positions, making plays for teammates, and opening the floor.(2) “If you’re the leader of a new business,” says Ford, “you have to be coaching the whole team—full-time employees, platform/fractional staff, partners, everybody. Plus, you need to think like an investor: what are we doing, why are we doing it, and is it working?”

Fractional staff
Fractional employees—people hired for only part of the time, generally on a no-benefits basis—are used by companies that need access to advanced expertise in a given area but cannot afford the full-time services (i.e., the high salary) of an expert. Few startup founders, for example, Ford notes, come from an extensive background in finance. They need guidance and skill in projecting their numbers, but they are aware that the median compensation for a chief financial officer in the US is close to $400,000 per year, plus benefits.(3) Rather than take on such a responsibility, startup CEOs increasingly turn to fractional CFOs, who work for them for a limited number of hours per month, at a small fraction of the cost of a fulltime CFO. The same holds true for chief technology officers(4) and chief marketing officers.(5)

At the other end of the hiring spectrum, startup companies, particularly in consumer-facing industries like e-commerce, retail, and fashion, may find themselves suddenly needing to hire large numbers of full-time customer service employees, developers, sales, and marketers. Rather than trying to set up and manage their own human resources department, such companies now often turn to professional employee organizations (PEO) to recruit, vet, and hire new employees, as well as to manage payroll, benefits, HR, tax administration, and other personnel-related functions.(6)

There are, notes Ford, both advantages and possible disadvantages in using fractional and outsourced services. On the one hand, it offers real and significant cost and time savings. On the other, it could, if not done carefully and conscientiously, raise a red flag with current or potential investors. The solution? Effective communication.

“Know what you’re doing,” says Ford, “and be able to explain it. If investors completely understand why you’re outsourcing a given function, they’ll look at you and see planning and fiscal responsibility. They’ll see that you’re thinking like an investor, and that you and they are on the same page.”

About DS9 Capital:
DS9 Capital is a founder-friendly portfolio management holding company focused on building enduring and stable cash-flowing businesses in the insurance and healthcare technology space. DS9 is generally focused on frontier technology and service offerings in the insurance and healthcare space largely leveraging cloud-based infrastructure, and more specifically on applying our domain expertise to nano-cap sized businesses to expand the value chain for all stakeholders. This value creation typically includes investment, leveraging our vast resources and networks to create a strategic pipeline for organic growth, and realigning the businesses to optimize commercial and IP assets. Our tactical goal with each of our companies is to leverage our expertise into higher margin and missed revenue opportunities.

1.    Balle, Louise. “Information on Small Business Startups.” Small Business – Chron.com, Nov. 2017, smallbusiness.chron.com/information-small-business-startups-2491.html.
2.    “Draymond Green.” Wikipedia, Wikimedia Foundation, 5 Apr. 2022, wikipedia.org/wiki/Draymond_Green.
3.    “What’s the Average Salary of a Chief Financial Officer (CFO)?” Investopedia, 24 July 2021, investopedia.com/ask/answers/010915/whats-average-salary-chief-financial-officer-cfo.asp.
4.    Salary.com, Site built by: “Chief Technology Officer Salary.” Salary.com, salary.com/research/salary/benchmark/chief-technology-officer-salary.
5.    Mitchell, Ber. “Council Post: The Benefits of Hiring a Fractional CMO (and How to Choose One).” Forbes, 29 Dec. 2021, forbes.com/sites/forbescommunicationscouncil/2021/12/28/the-benefits-of-hiring-a-fractional-cmo-and-how-to-choose-one/?sh=5d243d7fc157.
6.    “What Is a Peo.” NAPEO, napeo.org/what-is-a-peo.

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