6 ways to lower startup operating expenses and costs in uncertain economic conditions
The NYT’s reported Jerome H. Powell, the chair of the Federal Reserve, said that the central bank might be able to lower rapid inflation without tipping America into a painful downturn, though he cautioned that pulling it off would be “very challenging” to achieve and that a recession is “certainly a possibility.” “We’re not trying to provoke, and don’t think that we will need to provoke, a recession,” Mr. Powell said while testifying before the Senate Banking Committee on Wednesday. “But we do think it’s absolutely essential that we restore price stability, really for the benefit of the labor market, as much as anything else.”
As measured by the Consumer Price Index, inflation is running at 8.6 percent, the fastest pace in more than four decades, having re-accelerated in May thanks to surging gas prices and airfares. Although the economy remains strong and unemployment is historically low at 3.6 percent, the fast price increases have prompted the Fed to adjust its policy rapidly to try to cool demand.
The Fed’s policies to restrain demand and wrestle inflation lower are expected to hurt the economy. Central bankers themselves predict that unemployment will rise and growth will slow as higher rates take effect, making mortgages, credit card debt and business loans more expensive.
Silicon Valley companies have been experiencing layoffs and hiring freezes
Recently the LA Times reported that this year has been hellish for several tech companies and even established businesses and startups alike have seen layoffs and hiring freezes. Recently Techcrunch reported that employer workforce reductions have impacted startup employees in every massive sector, from crypto to SaaS to ed-tech and mobility and more. Andrew Murfet, an editor for Linkedin News published a blog post documenting that “About 17,000 workers from more than 70 tech startups globally were laid off in May, a 350% jump from April. This is the most significant number of lost jobs in the sector since May 2020, at the height of the pandemic.” According to an article in Protocal, it’s not just early-stage startups that are feeling the burn. Big tech companies including Meta, Salesforce, and Netflix have also recently announced hiring freezes or layoffs in the midst of cost-cutting pressure and rising inflation, coupled with a looming bear market and rising interest rates. Industry stalwarts (Microsoft), upstart social media companies (Snap), and crypto newbies (Coinbase) haven’t announced layoffs, but they’ve all slowed hiring after poor quarterly results. The S&P 500, dominated by tech stocks, has lost over 20% of its value so far this year.
Which companies have been impacted?
- Coinbase, a cryptocurrency exchange platform, laid off 18% of its workforce — or about 1,100 people.
- Short-term rentals startup Sonder laid off a fifth of its corporate employees. Touted as an upscale alternative to Airbnb, the company was valued at $1.9 billion less than a year ago.
- MasterClass, an education platform that sells subscriptions to celebrity-taught classes, has cut 20% of its team according to Techcrunch.
- Online personal shopping and styling service Stitch Fix laid off 15% of its salaried roles — around 330 employees.
- Healthcare startup Carbon Health laid off 250 employees, around 8% of the company’s global workforce.
- Meta (Facebook’s parent), Twitter, Intel, Lyft, and Uber have abruptly imposed hiring freezes, according to Fortune.
- Netflix has laid off 300 people, or around 3% of its workforce, because of slowing growth and the downturn.
- The Winklevoss twin’s crypto Gemini is reducing its workforce, along with stock and crypto platform Robinhood, which axed about 9% of its employees in April.
San Francisco’s chief economist Ted Egan told The LA Times “It started when the Federal Reserve began to raise interest rates,” Egan said. “Tech stock prices, and venture capital investment, are both highly sensitive to interest rates. When tech companies that are not yet profitable suddenly see that fundraising is getting challenging, they have to go into a cost-savings mode, and that can mean layoffs.”
Although Mr Egan is still sort of optimistic about the economy further stating “The labor market is still quite tight,” Egan said. “In San Francisco, even in the tech industry, where a lot of the layoffs are concentrated, there are three open job listings for every hire, so a lot of jobs are still going unfilled.”
6 Strategies for reducing your startup costs
There’s never a good time for an economic downturn, and there’s no telling how long one will last. For many startups, this means contending with increased cash burn and a shorter runway, at least in the near future.
One of the easiest ways to reduce that and tackle the issue is to lower your operating expenses. If you’re spending less money each month, then you’ll lower your burn rate, allowing for more runway. A bookkeeping startup Pilot wrote an article about how “effectively navigating a downturn may require you to strategically defer long-term investments, postpone hiring new employees, and scale back or cancel non-essential services and software tools.
Even if your business has been minimally affected so far, you may be looking for ways to cut expenses so that you have more cash on hand in case things change.
At the same time, going too far can be a problem, too. You want to lower your monthly operating costs, but you also need to be able to get things done and position your business to thrive. Essentially here are 6 ways to manage expenses, increase the efficiency of our organization, and better map your resources to your current strategy.
1) Postpone or put a freeze on making large investments
If your startup was planning to make any large capital expenditures this year, now is a good time to rethink that.
It is a good idea to update your revenue projections or financial cash flow forecasts based on the current economic situation. Before you make a significant purchase, rerun your numbers with those updated projections. Does it still make sense?
For capital investments to support growth, such as new equipment or facilities, consider what ROI you’re likely to see and when. A Forbes article suggested that if you need new equipment consider leasing rather than buying it. If current macroeconomics means your near-term growth opportunities are likely to stall, it might make more sense to delay those growth plans until your market has stabilized.
This applies to other large expenditures as well, such as marketing costs. Carefully consider the value you expect to get back; like the capital investments, it may make more sense to postpone big marketing pushes until a more favorable time.
2) Hire only who you need
Ambitious business owners are often eager to build their teams quickly, so they have all the right people in place from the beginning. But labor can be expensive – especially if you’re dealing with turnover, volatile revenue, and other growing pains of new businesses. Trim costs and stabilize your company’s finances by hiring only who you need—at least at first. For example, the publicly traded Crypto platform, Coinbase, has put a freeze on hiring, against its highest-priority business goals. Stating “As these discussions have evolved, it’s become evident that we need to take more stringent measures to slow our headcount growth. Adapting quickly and acting now will help us to successfully navigate this macro environment and emerge even stronger, enabling further healthy growth and innovation.”
3) Reconfigure Your Operating Budget
When you put together your budget for the current year, it was almost certainly for a different world than the one we are living in right now. With everything that has changed since then, it’s a good idea to take another look at what you planned to spend and where.
Approach this with an eye toward how your business is likely to look for the next year. Another Pilot article suggests that “if you anticipate fewer sales opportunities and higher churn, for example, then it might make sense to shift budget priority from sales and marketing into customer success.” In that business environment, your growth efforts are likely to be less effective anyway, while retaining the customers you do have becomes more important than ever.
A very important caveat, however: wherever possible, base decisions on your company’s specific numbers, not general guesses. Some companies are actually seeing improvements in their marketing ROI. For those companies, shifting the budget away from marketing might not be such a great idea.
4) Look for opportunities to renegotiate ongoing costs
Almost every company can be affected during an economic crisis. Your partners and vendors may be willing to work with you on adjusting payment terms to help your business stay steady.
For most companies, one of the largest fixed costs is rent. See if your landlord is open to renegotiation, or if your contract has provisions for the premises being unusable.
You probably also have a number of subscriptions active, from SaaS software product licenses to professional services. If you reach out to these partners and discuss your circumstances with them, some may be open to measures like temporary discounts or lengthening payment cycles. In extreme cases, you may be able to negotiate out of early termination penalties for services you simply can’t afford to keep.
It won’t always be possible to get new terms, but you never know until you ask.
5) Cancel all unnecessary subscriptions
If software and services are taking a big part of your budget, it’s time to consider what’s not essential to your daily operations.
Conduct a thorough evaluation of all the tools and services that your company uses, how much they cost, and what they’re being used for. One of the best ways to do this is to simply go line by line in your financial statements, and see where money is actually going (this is one of the many reasons why it pays to have accurate update books).
These exercises will oftentimes yield some obvious cost-saving opportunities; it’s extremely common for businesses to discover they’re paying for software tools with duplicate functions or ones that no one is actually using. Getting rid of unused or redundant tools is a quick win for reducing operating costs.
For the rest of your tools, take a critical look at what they’re used for, who’s using them, and if they’re providing value to justify the costs. Does everyone who has a license actually need to have a license? Are there nice-to-have software tools that the team could work without? Would dropping them be practical, or would the resulting workflow changes create a costly distraction from your team’s purpose?
For this process, it’s vital to work closely with your team leads to determine what’s actually non-essential. It can be tempting to just look for the highest costs and slash those, but cutting the wrong things can backfire. If losing a tool creates an extra hour of manual work each day for your engineers, that’s an hour they aren’t building your next feature. The lost productivity will probably cost more than the tool did.
6) Minimize payroll and overhead expenses
You also need to think about your overhead expenses. These expenses are ongoing and can’t be directly associated with a cost unit. This makes them difficult for new business owners to estimate and control and makes them potentially highly impactful to your bottom line. One of the easiest ways to reduce overhead expenses is to reduce the size of your workspace. If you’re launching a manufacturing business or if you’re in need of warehousing, there’s only so much you can cut; but many modern businesses can operate almost fully remotely, cutting the need to pay for a large office space.
Taking actions that affect your team is usually a last resort, but sometimes it’s unavoidable as I mentioned at the beginning of this article. For most startups, payroll is the biggest expenditure, and if your business is severely impacted by the downturn, you may have to make cuts here to stay afloat. However, “cuts” doesn’t have to mean layoffs. There are several other steps you can take first.
You can also reduce your payroll without reducing your headcount. If you planned to give your team bonuses, consider postponing or canceling these to preserve capital for operating costs. You may also need to consider lowering your employees’ salaries. This is never a popular move, but it can be the difference between keeping the team intact or having to resort to a layoff.
If you have no choice but to permanently reduce headcount: run your numbers, determine what you need to do to get back to steady footing, and do it all at once. When you’re navigating a downturn, the best practice is to commit to layoffs as soon as possible and make a deeper-than-needed cut so you don’t have to revisit this option again. Layoffs negatively affect morale; that’s generally unavoidable. What makes it worse, however, is ongoing uncertainty. Be transparent about what’s happening and why, and then explain to your team why you don’t anticipate further reductions.
The tech-hiring wave was wild. But we’re now in a slowdown. What does that mean?
→ Startups need to show a clear path to profitability.
→ Some startups over-hired and now they are cutting staff to right-size teams and manage more efficiently.
→ The pandemic boom for many companies wasn’t sustainable.
→ Unicorns, fearing the worst, are tightening budgets and looking to cut costs, starting with workers and initiatives that are often deemed non-essential.
→In the past, layoffs may have been put off by another round of funding, but now that follow-on funding isn’t a given, layoffs are becoming more common.
→As we companies manage through this downturn, they should look be transparent about the decisions they need to make in order to meaningfully manage expenses.
→If a startup operates with more flexibility and resiliency, and remains focused on the long-term business goals, then it has a better chance of surviving and coming out stronger on the other side.