Thresholds of Spending

What seems like “a lot” of money? There is no absolute answer as it really depends on what you are used to spending routinely. This is one of those phenomena that affects entrepreneurs as they grow their companies – and it deserves some intentional management.

What is a “big” expense?

Let me illustrate how our sense of thresholds in spending varies – and how tricky it can feel. Early in one of my startup’s life cycles, we lived on a shoestring budget, using found materials, borrowed space, and sweat equity. I paid attention to every tiny expense. Eventually, we progressed and raised some money so we could expand the team, secure our own space, and invest in our prototypes. At that point, spending $1,000 became routine. Just like I did in my personal life at the time, where $1,000 was an expense level that I would check in with my spouse before committing us to, $1,000 for a business expense deserved some scrutiny.

Then, as the business grew, orders flowed in, and products flowed out. Now, with a bigger team and a much higher volume of transactions, I got used to my financial team showing up weekly with a folder of prepared payments to authorize. I would buzz through tens of thousands of dollars of expenses in minutes. Then, it felt a bit wild when we needed to commit to a significant volume contract for a high-value component. I distinctly remember staring in wonder the first time I signed a $1M supply contract. The following weekend, I was out shopping and suddenly realized that my sense of scale in furniture expenses was utterly distorted. No, spending tens of thousands of dollars in my personal life without thought or my spouse’s agreement was not okay! That was when I became acutely aware of the need to consciously switch my threshold of acceptable spending between whether I was wearing my CEO hat or my personal Jen Baird hat. Ever since, when authorizing spending, I take a beat to remember which hat I am wearing and what the appropriate spending threshold is.

Thresholds of Spending

What is this spending dynamic all about?  Basically, we grow accustomed to spending certain amounts of money easily up to some threshold, and, above that threshold, a higher standard of justification is required.

If you have not yet had a high spending threshold in your business life, you can probably relate to this dynamic in your personal life. For example, what do you consider a “big” personal expense? Maybe in high school, $20 was a big number? Maybe your threshold for “big” grew to $50 or $100 in college?  Once started in a career with a regular paycheck, expenses that are a few hundred dollars become more routine. Then, joined with a spouse and two established careers, what is the level of expense that requires a check-in with that spouse before pulling the trigger? Imagine how that threshold might be even higher if you were a millionaire or a billionaire. Consider this dynamic in your or your family’s personal spending and how it has evolved over time and at different income levels.

Now, consider that the same progression happens to entrepreneurs as they grow their businesses. (I suspect it goes without saying, but these are representative – and your experiences, staging, and thresholds may vary…):

1. Bootstrapping Entrepreneur – At this stage, every penny matters. Every discount matters. How can we creatively find a grant or free software or materials from the back of someone’s garage to get the proof of concept we need to derisk this concept we have? Can we work from home? Can we borrow some equipment? Can we pay someone with equity? At this stage, a “big” expense can easily be at the same level as we experience in our personal lives.
   
   
2. Pre-seed/seed stage Entrepreneur – Raising a “small” amount of capital, like $500,000 or $1 million, and the threshold for a “big” company expense moves into the thousands. We might hire someone for a $50,000 salary, buy a $10,000 piece of equipment, or invest in a few thousand dollars of SaaS software tools without obsessing over finding the absolute cheapest alternative. Likely, we will pause and consider our options before spending $1,000. Still, we will be willing to pay an extra $50 to get to a quicker solution rather than spending many hours researching incrementally cheaper options because now our time becomes more valuable relative to the cash outlay.
   
   
3. Series A/B Entrepreneur – Raise $5M to $10M, and the threshold moves again. Now, we are hiring a small team, including several employees with six-figure salaries, that can accelerate our progress. We might spend $50,000 on a critical path consultant who can punch us through a barrier. We can afford to pay $100,000 to build prototypes or conduct a small exploratory clinical study.
   
   
4. Series C+ Entrepreneur – Now, we are balancing many more financial levers as we seek to scale commercially, investing in a sales force of high-priced, highly capable people, exhibiting at conferences, hiring marketing specialists, and so on.  With $15M to $30M raised, our team is growing rapidly with judicious use of recruiters to help source the right talent; our manufacturing line demands investment in equipment and inventory to produce products for sale, our cloud service provider bills start to escalate into the hundreds of thousands. At this point, spending to move faster is a wise move to create the growth momentum that becomes a high-potential business. This is when you may well find yourself committing to a seven-supply contract, just as I did.

Implications of Increasing Thresholds

Here are some reasons why spending thresholds deserve your conscious attention:

First, when you progress from being hamstrung by a lack of funds and squeezing every penny until it screams and trading your time to shop for ways to save at every turn to raising some capital, to be effective, it is imperative to conscious shift out of the poverty mindset habits that have helped you get as far as you have come. Be sure to actively change your threshold of spending and begin to invest some money to save time. You do not want to go crazy or spend unwisely, but it is equally unwise not to spend at all.

Second, the next transition happens when you have grown your team enough to have some ability to “divide and conquer.” At this point, you will need to provide enough resources to your team members for them to be effective in doing their work. Do not hamstring a data scientist or computer engineer with a bare-bones computer. Make sure your mechanical engineers can buy the supplies and equipment they need to actually build a prototype that has a good chance of working. Invest in enough space, so your team does not need to spend hours dismantling and reassembling their experiments in some common area. All these tradeoffs require being willing to spend more freely so that your human resources have what they need. You must become willing to let them spend to get a mid or premium-level solution rather than always trying to scrape by on the cheapest thing available, thereby wasting time as they must work around the cheap version’s limitations.

Eventually, you will need to become skilled at trading money to reduce time and risk and learn to delegate effectively by clearly defining success and empowering your team to go out and creatively make it happen within the risk guardrails you have identified. You will need to master how to monitor and empower while not micromanaging. The people on your team should be able to spend $1,000 on their own, while a $50,000 expense should require your review.

At each stage, what levels of spending deserve your direct involvement shifts. It is essential to be aware and intentional about deliberately shifting as your company grows so that you do not strangle its progress by retaining control thresholds appropriate at an earlier stage too long. In other words, as your company scales, so must the level of your involvement in spending. While at the earliest stages, you might be deciding whether to spend each $100, eventually, you might find that you are approving project budgets with $10,000 or more line items that someone else put together.