The founder of Hotels.ng and startup investor, Mark Essien has shared two vital tips all startup owners should know in order to grow their businesses.
Sharing his thoughts yesterday via the social media platform, Twitter, Mr Mark Essien asserted that he was speaking from experience on what he had observed over time, which he wished he knew before starting his business.
Two things I did not get when I entered startup business: 1. If you raise money that has a 1x preference, every dollar you spend on a frivolous stuff is coming straight from your pocket as a common shareholder. Because the preference money is like debt you must repay.
— Mark Essien (@markessien) August 25, 2019
According to him, when startups raise funds that have a 1x preference (for example, $1 million), every dollar they spend on something frivolous would be their loss because they still have to pay back the $1 million preference money before they start to reap their own money as shareholders.
He said this is why one needs to be careful in spending even when one is growing fast. According to him, the money one gets should be spent on things that will drive growth, not on fancy things like a nice car and so on.
Below are his words.
“If you raise money that has a 1x preference, every dollar you spend on frivolous stuff is coming straight from your pocket as a common shareholder because the preference money is like a debt you must repay.
“First, ensure the preference money is ‘complete’ and growth is clearly upwards and there is a clear point where company asset value is equal to preference before thinking about putting money in nice-to-have.
“The second thing is this: If you are growing fast, you do not need and should not have accounting profits. You will make some ‘profit’ but it will be clear that the money generated should be used to purchase more of the things that drove the profit in the first place.
“The profits only should come when investing in things that drive growth. Once the curve starts flattening, then you start collecting.
“The initial revenue/profits should not be used on things like higher salaries, nicer office and so on, because those are not the things that drive more growth. They should go back to creating new growth units.”