By Ksenia Novikova, head of operations at F1V
Startups exist as long as they have money in the bank — it seems so simple, but founders often overlook this aspect being busy building their company.
Meanwhile, empty coffers are the top reason why startups fail. According to CBInsights, 38% of startups shut down because they run out of cash or fail to attract new funding.
It's a common scenario when startups spend a lot and are short on cash while expecting additional funding from investors. But this may not happen, and the company will close.
Counting on existing funds and lowering the burn rate, instead, can prolong your runway. And this is the right thing to do: Given the market situation, a low burn is a good sign for investors to support a company.
The principle is “earn more, spend less” (thanks, cap!). But what costs should companies cut? And how can they do it wisely?
Drop nice-to-have things
Startups should trim non-vital expenses that have emerged over the past 1-2 years. Software subscriptions and office rent can eat up a big chunk of a startup’s budget — review what they cost you.
List all services your team uses and give up those not essential for daily operations, or downgrade them to cheaper or free plans. These could include CRMs, tools for project management or communication.
Cloud storage costs can also add up quickly, so check them too. If possible, defer payments for the services you need or opt for installment plans.
If your company rents an office, consider switching to remote work. You can also try a hybrid format and rent co-working space only for days when your team needs to brainstorm or meet with partners or clients. If you need an office every day, negotiate discounts with your landlord.
Nice-to-have amenities — you can have them later. Once our portfolio startup postponed opening an office to get more time for fundraising.
Focus on main product features, key marketing activities
Developing new products and features can wait until the financial situation improves.
If you have a product, stop supporting not profitable features. If it’s a fitness tracking app, it can be personalized workout plans that require ongoing maintenance but aren't popular among users. Proper product analytics can help make such decisions.
Testing new marketing strategies can also wait, but don’t fall into extremes. There’s no need to significantly slash marketing budgets if you have a positive ROMI and a validated strategy. Another mistake is cutting costs on activities that aren’t yet profitable but are soon to become key revenue streams.
Rightsize team, compensations
Review the team structure, and check if you don’t pay over-market rates, or if your teams aren’t too large.
Ask for assistance from your board members, investors, and advisors. I often make a map of internal processes in Miro for portfolio companies, detailing all their operations and who’s responsible for each. It shows where they need to reorganize the team.
Startups often reduce tech teams to lower burn. Once our startup had such a costly development team they could create two products instead of one with that budget.
Layoffs don’t commonly affect C-level positions. But given their high costs, you can make minor leadership roles part-time or engage high-paid specialists on an hourly or contract basis. Also, consider outsourcing or making some roles part-time in design, coding, marketing, legal and accounting services.
When it comes to employee perks, think twice. Some startups cross off these benefits, but this isn’t right. Most companies don’t send their teams to exotic islands, and having some bananas in the office is nice and won’t cost you much.
RedTrack, which develops a tool to track and analyze ads performance, reduced its monthly burn rate from $70k to $10-20k within a year.
In December 2022, the team saw they couldn’t cover their burn using available funds and cash collections. They had made changes to the product in mid-2022 but needed time to see how it would affect sales and revenue. At that point, the startup was running out of money.
For the months ahead, the team planned cost-cutting combined with growth activities, intended to help the company approach zero burn. The startup suspended new R&D initiatives to focus on growing and selling its existing product. It also gave up the office, some subscriptions, and laid off part of the sales, marketing, development, and customer support specialists.
However, the team reduction was minimal to allow the company to keep growing. The same logic applied to marketing budgets. Costs were capped so that growing revenues would cause a gradual decrease in burn.
Also, RedTrack received convertible loans (CLAs) from investors and business angels and later obtained a credit line to cover cash gaps during the initial period of plan implementation.
By actively securing annual deals with clients paid upfront, the startup achieved a positive cash flow while keeping an optimal net burn. In less than a year, by December 2023, its monthly revenue grew by 75%.
Сommunicate cost-cutting smoothly
The CEO shouldn’t just come and say to cut budgets and let half of the team go.
C-level executives must consult with team leads and create a plan together — don’t just “inform” people. Define why you should cut costs, how much, which costs, and then communicate it with the team.
Explain the reasons for downsizing to everyone and say that the business isn’t closing but needs to be optimized. Setting priorities for this period and choosing a North Star metric can be helpful.
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