The alarm bells have rung loudly in startup-land: public stock turmoil and other factors have caused investors to pull back. VC’s believe capital will be harder to come by and at lower valuations (and it’s not just VCs, founders agree too). Thus, investors are cautioning their companies to cut burn and conserve cash so that they can weather the storm.
The mandate is straightforward: minimize cash burn to give your company as much time as possible to capitalize the business from a position of strength. OK, but where to start? And, how do you reduce burn without negatively impacting growth or company morale? While the exact formula will depend on a number of factors specific to each company, this post will take a tactical approach to the major expense categories of all tech companies and the types of actions leaders can take to get more lean and still position themselves for growth.
This post is focused on controlling expenses, but it should be noted that there are other tactics companies can employ to improve their cash-flow profile. Joe Floyd of Emergence Capital has a great post on five hacks to conserve cash without cutting costs. Unfortunately, for many companies these strategies are not enough to move the needle far enough.
Without further ado, below are several strategies for the major expense categories of a high-growth technology company:
Salaries and Benefits
People are the life-blood of any tech company and, accordingly, salaries and benefits typically make up the vast majority of a startup’s expense base. Going name-by-name in an attempt to cut out the underperformers may seem like a logical place to start, but it’s often a fool’s errand. First, startup leaders (especially founders) often have strong emotional attachments with their team-members, particularly those that have been with the company the longest which makes purely objective assessments challenging. Second, the structure and mix of skills needed today may be fairly different from what was needed one or two years ago, which can be difficult to evaluate if your starting point for this analysis is today’s org chart.
Rather, a zero-based budgeting approach can be a helpful exercise here. Start from scratch and build your dream-team (in terms of roles, not specific people); you may find that it looks different from your current org and highlights opportunities to eliminate positions (both current and planned) that are not aligned with your goals as a company today.
On top of gross salaries, one often-overlooked, yet material, expense is benefit costs. Many startups work with PEOs which offer out-of-the-box services, but their fees are significant. If you have over 50 employees it’s likely more cost-efficient to bring payroll and benefits in-house. Even it makes sense to stay with a PEO, it’s prudent to shop around several months before your annual renewal period if for no other reason than to keep you current provider honest. There’s no downside, and you’ll often find considerable room for negotiation (both from your current provider to not lose your business, and from alternatives looking to win your business).
Sales and Marketing
Regardless of fundraising climates, startups must always be thinking about growth. But the “grow at all costs” mentality of the last several years has suddenly shifted to a focus on efficient growth. This doesn’t mean that you should cut spend across the board; what it does mean is that an increased attention to unit economics and smart investment is required. Are you a B2B software company with prospects and customers spread out across the country or world? It’s a good time to re-evaluate your travel policy to ensure that an opportunity meets certain qualification criteria before your AE jumps on a transcon flight to go visit them. If you’re a B2C company, keep spending on that profitable SEM channel, but hold off on the first time national TV ad buy, especially if it’s a big part of your budget.
Perhaps the only thing that has risen as fast as a software engineer’s salary in the past several years has been the cost of the office space where he or she works. From 2009 to 2014 average real estate prices nearly doubled in San Francisco, from $36 per square foot to $63.
That tricked-out office in SoMa or SoHo may feel like a must-have to keep your employees happy and attract recruits, but the value of a cushy work environment is often overestimated. Many startups are now considering less-sexy options such as Oakland or Brooklyn that offer more (relatively) affordable rents. Subleases also offer opportunities to get in at below-market rents, and provide flexibility (shorter lease terms) that direct leases don’t.
While rent is often the only material fixed cost for a startup, there are dozens, probably hundreds of brokers willing do the work for you and for free (their fee is paid by the landlord), so it’s definitely worth investigating your options.
Internal IT (Infrastructure and Hardware)
The move to cloud-based services has shifted the vast majority of IT spend from a fixed cost to a variable one. However, this doesn’t mean that there’s been a drop in the magnitude of spend. Time and time again I see high-growth companies leaving money on the table by not actively optimizing their hosting spend or letting their SaaS costs get out of hand.
On the infrastructure side, as a first step (if you haven’t already), I’d recommend working directly with your hosting provider to explore options. If you have some visibility into your needs for the coming year, Reserved Instances and prepaying for capacity can generate cash enormous savings vs. on-demand and monthly pricing plans. You may be pleasantly surprised by how willing AWS is to help you drive savings here. Additionally there are a number of consultants and tools (such as Cloudability and Cloudyn) that focus exclusively on optimizing your cloud infrastructure costs.
Managing your various software tools across the organization can be a bit more challenging as you likely have dozens of vendors rather than one hosting provider. What’s important here is not only to get a handle on the tools you currently have deployed (and clean up the associated waste that’s accumulated) but also to put in the necessary policies and procedures to prevent this waste from occurring in the future. The former can be accomplished via a comprehensive audit to understand spend and utilization. Then, implement best practices around software procurement going forward.
Depending on your business there are likely other key expense areas that present opportunities for cost control. A careful examination of the key cost components of your business is an important exercise that requires a rigorous and non-emotional approach.
All this said, this is certainly a time to employ the 80-20 rule. Don’t try and save 10% on your printer paper costs by switching your office supplies provider. Don’t cut out the Kind bars or the next employee happy hour. Focus on the major expense categories that will really make a difference.
One more thing: there is a common misconception in the the tech industry that the first word of cost control will send employees running for the exits, afraid that their company is on the cusp of collapse. However, a thoughtful and open discussion about the importance of expense management can actually have the opposite impact: it gives employees confidence that management is acting responsibly and optimizing for the long-term value of the company. Not to mention, rumors are typically worse than the truth.
Especially during times of uncertain financing markets, it’s extremely important that companies reliant on outside capital be prudent about their cash-flow profile so that the next time they need to raise money (if ever!), it’s from a position of strength, and not one of desperation. Achieving this requires employing a happy medium between “grow-at-all-costs” and a 3G Capital-style “cut-at-all-costs” approach. Do this well, while still growing and innovating, and you will position yourselves very well despite these uncertain times.