Warren Buffett, at the ripe age of 18, learned to grow his wealth in a way many young startups couldn’t. Buffet and a high school friend bought a pinball machine to put in a barbershop, hoping to make a few bucks. However, he didn’t run out and spend his earnings on new sneakers or a cool car: He reinvested them.
Buffet and his friend bought more pinball machines, eventually stocking eight local barbershops. When they sold the fledgling business, he used his profits to buy stocks and start another company. Today, Warren Buffet — who once was nothing more than a kid with an arcade game — is worth more than $67 billion.
Regular reinvestment has huge benefits for startups. Reinvesting increases working capital and leads to higher valuations, allowing companies to invest in larger growth projects and attract more investor attention.
My company advises mobile startups it works with to reinvest early in their best performing marketing channels. By striking when the iron is hot, these entrepreneurs drive down cost per install and cost per loyal user, ultimately lowering marketing expenses.
In addition, entrepreneurs who choose to reinvest in their businesses build equity and avoid amassing debt. Using existing funds for expansion and growth means forgoing loans and interest payments that can hamstring a startup’s finances. Entrepreneurs who self-finance through regular reinvestments also avoid dilution of ownership, retaining control of their companies’ futures.
Your company’s expenses and growth trajectory will dictate how much you can set aside for reinvestment, but aim to reinvest about half of your profits for the first few years.
Because my company is pursuing growth, we reinvest upward of two-thirds of profits back into the company. We have huge goals for 2016, so we’re reinvesting to improve onboarding procedures and user experience, to hire more people to serve our customers, and to grow our customer base.
Ultimately, to determine your reinvestment strategy, start by setting aside funds equivalent to six months of expenses. Then, look at sales trajectories to determine predicted revenues during that same period, and determine how aggressively to reinvest based on trusted data.
Deciding where to put your profits is just as important as determining how much to reinvest. You want to make sure each reinvestment is strategic and scalable, but also that it sets the company up for future success. These four areas should be top candidates for reinvestment:
The power to grow your company is in your hands — and in your revenue. So take a page from Warren Buffet and reinvest: It’s your startup’s ticket to bigger and better things.
About the Author
Keith Smith is co-founder and CEO of Payability, which works with suppliers to accelerate payments from online marketplaces, giving entrepreneurs the working capital needed to grow their businesses. Previously, Keith founded CyberMortgage and Zango and served as co-founder and CEO of BigDoor. Keith lends his time to early-stage startups via Techstars and serves as an adviser, investor, and board member for multiple tech startups.