Trim Costs Before Entering The Funding ‘Winter’
In Silicon Valley, the weather is warming, El Niño is bringing much-needed rains, and the flowers are already starting to bloom.
But economically speaking, winter is coming. And if you’re running a startup — or a tech company at any stage — it’s time to get ready for bitter business headwinds and a frozen financial landscape.
Few have wanted to hear this message, but it’s become increasingly inescapable lately. Heidi Roizen, a venture capitalist with Draper Fisher Jurvetson who went through the dot-com bubble implosion as a CEO, recently published some tips for startups on staying alive. It’s a good read. Her main point: You can’t expect to win if your company can’t even survive. In the short term, that means trimming your costs and increasing your revenues.
“You know what kind of companies generally survive?” Roizen writes. “Companies that make more money than they spend. I know, duh, right?”
It sounds obvious, but the advice is meaningful and timely. The fact is, it’s bad out there. The S&P 500 erased $1.78 trillion in market capitalizationin just the first 12 days of 2016. Nearly every IPO of the past three years has been a disaster. Some stocks, like LinkedIn LNKD +1.50%, are getting really hammered.
California lost 10,000 jobs in December, 2015, according to the California Employment Development Department. And some job categories, like business development and corporate development, are especially hard hit.
It’s time for all companies (and startups in particular) to get nimbler and more flexible.
You can no longer count on raising another round. In fact, as a tech company, it’s safe to assume you’re not going to raise more money. You’re either going to become profitable, or you’re going to die.
The trick is to increase your runway without kneecapping your growth. Don’t make the mistake of, for instance, cutting your marketing spend across the board simply because it’s easy and seems nonessential. Founders who do this quickly learn that there is a predictable ratio between marketing spend and revenues. That ratio differs from company to company, but if your marketing organization is reasonably well run, there will be a positive correlation. In other words, if you cut your marketing spend, your revenue will drop — and you can quickly find yourself even more underwater than you were before.
So how do you achieve revenue growth without increasing costs? It means taking a very hard look at the business fundamentals and focusing in tightly on meaningful metrics. Here are some guidelines:
Focus on the right metrics. Danielle Morrill, the founder of data company Mattermark, has compiled some good benchmarks you should aim for Target a maximum monthly burn of $10–12K per employee. Trim back your real estate spending: Limit office common space to 150 square feet per employee. Plan on hiring one customer success person for every $2 million in revenue. And get to break-even as soon as possible with each of your sales reps.
Use flexible cloud-based solutions. Wherever possible, use cloud-based applications that can maximize your flexibility: ZenPayroll for the payroll process, Zendesk for customer service, Xero for online accounting, and so on.
Reduce your standing monthly overhead. Anywhere you can replace a fixed monthly cost with a variable one is good: This buys you flexibility so you can scale up or down as needed. For instance, large annual contracts for IT or telephone services can often be renegotiated. You should also examine any big monthly payments to service providers like Salesforce to see if you actually need all the users or capacity you are paying for. If not, adjust the contract.
Remember that cash is king. Forget the fancy accounting metrics (net adjusted segment revenue, or even relatively simple things like SaaS revenue received policies). One thing matters, and it’s cash. In a down market, it’s all about lowering your cash burn rate. Can you increase your working capital by getting customers to pay you earlier and paying your vendors later? Or by aligning sales commissions with cash paid by clients? Also, remember: The longer you wait the harder it will be, since cash you’ve burned will never come back. So if you have to cut, cut early rather than waiting.
Move to zero-based budgeting. Companies build fat over time. It always feels like you’re understaffed, and every one of your executives is probably telling you they need more people. But now isn’t the time to scale up by hiring people: It’s time to stop doing the things that aren’t strictly necessary and that increase your burn. Adopt a zero-based budgeting policy: Managers can’t assume that last year’s budget will continue this year; they need to justify every single item on their budget. Take the time to force rank the big areas of spending, and for each, decide whether they are still needed and at what level of funding. This includes, among other things: reducing your PR agency spend; reducing your online marketing spend where the ROI isn’t there (or the payback time is too long); stopping some of the projects in your product roadmap and focusing on doing fewer things very well; paring down IT-related costs (do you still need all these licenses? do you need to pay support for each of your Mongo databases? are you properly utilizing the right size of AWS instances?); and last but not least, checking whether your salespeople are actually generating more revenue than they cost you.
Hold off on long-term investments. Finally, consider slowing down or stopping investments that are not likely to give you a return in the next 12–18 months. You need to make investments that will pay off next month, or in the next few months. It’s great to invest in the future, but the future won’t matter if you aren’t there to enjoy it.
It’s not going to be easy. Markets — and startup valuations — are taking a beating, and that can be hard on morale for both founders and their companies, as VC Om Malik recently noted. The key is to focus on what matters most: Building a great product, shaping a sustainable company, and keeping the company afloat and on course.
“What really matters is the company: its product, its technology, its founders and the business they are trying to build,” Malik writes. Focus on those, and your company will have the best chances of survival.
Winter is coming: It’s time to suit up and get ready to plow through the coming storms.
Originally published on Forbes on March 21, 2016.