How to Cut your Startup’s Costs without Layoffs in the Era of COVID-19
The world has changed for startups in the last several weeks. Many have closed offices, seen their top customers shut down, or had fundraising efforts come to a halt. For almost all founders, this new environment means you will need to cut costs in the near term.
Although your largest expense is most likely labor, and layoffs are a very effective way to cut costs; if you’re trying to avoid slashing the team, here are your options:
Freeze Hiring
What: Stop all hiring unless it’s to replace existing headcount in an essential function. Remove all open job postings and politely stop any existing recruiting conversations. For example: you might pause all new Sales Development Rep (SDR) hires or end conversations with a potentially high-salary VP of Engineering candidate.
Why: Labor is expensive and if you can keep your team size low, you can keep your costs low too. You may need that additional runway if the current crisis is prolonged.
Cut Marketing Spend
What: Cut marketing spend to the absolute minimum, zero if possible. Immediately stop all experiments, such as testing new markets or new formats. Only retain marketing channels with overwhelming ROI, ideally 5x or more, for example: $100 customer lifetime value for $20 cost of acquisition, where you make back the acquisition cost ($20) within the first 90 days.
Why: New customers are less likely to be interested to buy at this time given the high levels of economic uncertainty COVID-19 has caused globally; as most are trying to stay in business rather than commit to new spending. Thus, it’s better to save your efforts and money for less turbulent times and, instead, focus on keeping your existing customers.
Cancel All Events
What: Cancel all in-person events for 2020. This includes conferences, parties, offsites, and other gatherings. For example: if you were planning to host a customer conference in Q2; that should be cancelled ASAP.
Why: Social distancing orders across the globe make most event cancellations a requirement in the near term. If you cancel all your events early, you’re best placed to save money, recoup payments from providers, and move the budget to other critical needs. Plus, social distancing behavior may last long after restrictions are lifted, so it’s better to be conservative until we see how and when people’s previous habits return.
Cut Office Perks
What: Cut extravagant in-office perks during social distancing, and even thereafter. Expensive snacks and alcohol can wait for a moment of celebration. For example, there will be little need to have 3 beer specials on tap once back in the office.
Why: Spending money to improve morale is a reasonable strategy when you have reserves. If you’re in cost-cutting mode, you don’t have the budget to spare, and most employees will be motivated during this time by simply keeping their job. Consider allocating a more modest budget to remote perks, such as increasing Wi-Fi speeds, now that your team is at home.
Cut Low Usage Services
What: Review and eliminate all service providers your company pays which are not heavily used or not essential for business operations. For example: research reports and news subscriptions.
Why: If you’re paying money for a service you’re not using, that’s an easy place to cut when money is tight. Be sure to communicate with your team to know for certain a service isn’t essential before turning it off.
Request Discounts for Essential Services
What: Approach all providers of essential services and ask for a discount or delayed payment. This includes landlords and creditors — anyone you have to pay, it’s worth asking! For example: you might ask your landlord for a 3 month rent delay or ask your bank creditor for 6 months payment deferment.
Why: With large chunks of the global economy shut down, most businesses are unable to generate revenue to pay for essential services. Given you’re not alone in this need, everyone is being forced to compromise or lose their revenue entirely.
Find Lower Cost Essential Providers
What: Do the work to get competing quotes for your essential services and, where possible, move to lower cost providers. If you can’t switch providers, use the competing quotes as leverage for a discount. For example: you might switch from an expensive, brand name law firm to a reputable independent lawyer.
Why: Given you will need to keep spending money on these providers throughout the crisis, reducing their costs is one of the best opportunities to reduce overall spending.
Reduce Online Server Costs
What: Analyze what budget you need to stay online, with reasonable breathing room based on previous, recent traffic spikes (usually 2–3x current usage). If you have cash on hand, push for steep discounts from your provider in exchange for early payment. For example: you could pay for 1 year of server costs upfront, and ask for a 75% discount in return.
Why: Lured into bad habits by huge initial credits, many startups have excessive recurring cloud server bills. Although this gives you infrastructure to deal with a 10x traffic spike, it is not currently necessary, unless you’re seeing growth as a side effect of the current crisis.
Pay Equity-Only
What: For those who are able, move the executive team and senior management to equity only payments. For example: they continue to work and vest their stock options but do not take a salary. You can also offer this to volunteers on the team with an additional equity bonus, and some employees might see it as an opportunity to increase their stake in the company while being helpful in a time of need.
Why: As executive salaries are amongst the largest in a company, this approach can save significant capital, if it’s feasible. Furthermore, the example it sets can inspire other team members to follow suit and drive more savings.
Keeping your startup running during the era of COVID-19 will be challenging for many. Take the necessary steps to cut the costs now, so you have the best chance of thriving when the opportunity arrives.
This article is part of a series on Startup Hiring & HR.
Where to Find the Best People
How to Hire Great People
How Interview Projects Stop Bad Hires
How Startups Make Offers People Sign
7 Reasons to Give Employees More Equity
Why You Have to Fire Fast
How to Cut Your Startup’s Costs Without Layoffs
Doing Layoffs the Right Way
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: ash@sterlingroad.com
Thanks to Kaego Rust for their help on this article. More articles here.
Photo by Joshua Sukoff
