5 strategies to reduce your startup’s expenses and extend your cash runaway
Recently I came across a startup founder Brandon Arvanagi who tweeted about 4 strategies he used to earn his startup an extra $1,450,000 a year. And it has nothing to do with selling a product. Most startups take several years to become profitable from their sales or revenue and as a result, they require an adequate supply of cash on hand to meet their monthly expenses. Recently many large technology companies have been looking for ways to cut costs, which has resulted in cutting a percentage of their workforce. Cutbacks are coming at the request of the very same venture capital firms that have been, until recently, encouraging tech start-ups to pursue growth at any cost. They are now getting the message loud and clear that they need to keep things tight and rethink their staffing needs (i.e. drive efficiency with fewer employees).
That’s what VCs have been advising for nearly a year now (remember Sequoia Capital’s “crucible moment” memo in May?). Startups are also laying off employees left and right: Entrepreneur mag posted an article documenting that CEO of tech firm Pagerduty wrote an internal memo “after considering a range of approaches for strengthening the company as we move forward, we are further refining our operating model as we work to increase our capacity while improving our cost structure, focusing our efforts, and improving our return on investments” where she announced she is laying off 7% of its total global workforce (about 66 employees).
If you are a startup that recently raised a Series A or seed round of funding you might have plenty of cash at the moment, but staying lean, and focused on reducing expenses and having flexibility can help you weather the recession.
Here are the easiest ways to extend your runway in 2023.
1) R & D Tax Credits
Do you pay for…
- Employee salaries?
- Cloud computing (AWS)?
Then you can probably claim tax credits that not all cpas check for. The Tax Cuts and Jobs Act in 2017, included a five-year ticking time bomb that would completely change the way R&D expenses could be deducted.
NEO Tax published a post titled “R&D Capitalization Has Arrived (For Now)—Here’s What You Need To Know,” in which the new law changes the way R&D spending can be deducted, which completely changes the calculus for pre-revenue startups. Up until 2023, R&D spending could be deducted all at once, which allowed companies in the red to stack NOLs. Now, R&D spend must be amortized fractionally over the course of 5 years,
But you don’t need to do this yourself. Service by a software company called NEO Tax does this for startups. They offer services using software to automate compliance with the new R&D Capitalization rules (§ 174) …while claiming your R&D Tax Credit against income and payroll taxes.
EARNS: UP TO $250K
2) Invest idle cash on the balance sheet in 4.6% T Bills to extend Runway
A financial cash management software startup called Meow helps companies earn more yield on idle cash reserves or working capital on the balance sheet or in the bank with ~4.7% U.S. Last Oct 2022, I wrote about cash flow management strategies that corporations are using to balance risk vs reward when investing excess corporate cash on a short term basis to get a return.
Why did no one buy Treasury Bills before?
- In 2020, the interest rate on a 1-year treasury bill was 0.10%*.
- On $10 million, you earned $10,000.
- Today, the same t-bill pays you up to 46x (or 4.6%*)!
That is a potential $460,000 to extend your runway or hire more engineers*.
Mr. Arvanaghi explains that this is a creative strategy for runway extension:
~4.7%* U.S. Treasury Bills.
1 month, 3-month, 6-month, and 12-month Treasury Bills.
He explained that “this generates ~$1 million a year to extend our runway to weather the economic storm.”
EARNS: $1M depending on how much cash reserves your startup has.
3) Outsource Your HR, AR/AP and Operations Tasks
Mr. Arvanaghi, explains that he saved his startup money by cutting back on hiring full-time salaried hr and operations employees. Previously, every company wasted hundreds of hours a year managing operationally intensive, tedious, non-strategic processes.
Saying “Do you need a full-timer to handle salary, healthcare, and bill pay?”
No chance. So what do we do? Instead, he leverages and outsources the back-office operations needs of his startup to LevyOperations and AbstractOpsCo. They manage key aspects of your HR from hiring to firing to training and IT, globally.
Complying with 50 States, the Federal Govt and Intl regulators is challenging. We track and take action on your behalf. Stating that saved them time and money stating “I forward an email. Bills get paid and tasks get done. It’s a dream.” It says they also can take care of Accounts receivable and accounts payable, and interface with bookkeepers & accountants, reimbursements, and even build financial plans.
4) Monthly Vendor Software Subscription Contracts
Many software providers will try to entice you to purchase annual subscriptions for discounts.
Why is this wasteful?
Startups move fast and quickly outgrow software tools.
If you lock in a 1 yr contract and only use it for 6 months, you burn half a year of software spend.
Month-to-month contracts are key for flexibility in case you need to switch to some other tool.
5) Reduce expenses
If you are currently looking to extend your startup runway, cash conservation should be your number one priority. Reducing operating expenses is one of the easiest ways to stretch your cash reserve further. A company called Acubum published a post and gave a few suggestions on ways to reduce expenses as a startup such as :
- Slow down hiring: Bringing on a new team member can be expensive. If you have been rapidly growing your team, slow down and only prioritize the most critical positions that need to be filled. If you find yourself with only three to six months of runway left, you may be forced to lay off employees. While no founder wants to have to make this decision, headcount is often the biggest expense for a company and can be the difference between life or death for a struggling startup.
- Rethink your office space: Do you currently pay a lease for an office space or coworking space? If you want to cut down on operating costs, consider downgrading to a smaller office space or adopting a fully remote working policy.
- Prioritize spending: What tactics have previously brought success to your organization? Whether it’s focusing on sales or marketing initiatives or doubling down on product development, invest in outlets that have a proven track record for supporting growth. From there, cut or reduce spending on all other areas that do not positively impact your bottom line.
- Cut ad spend: It’s common for SAAS software startups to pour money into ad spend. Companies will set Monthly Recurring Revenue objectives and adjust their ad spend accordingly to help them reach their targets. While ad spend may help bring in leads and ultimately close deals, this investment often comes at a high cost. As companies continue to scale, their advertising budgets must also increase to keep up with this increasing MRR target. Startups in danger of going under should cut ad spending and focus on growing their revenue more sustainably. While a company’s growth rate will take a hit, this is one of the immediate ways for startups to cut costs and stay afloat.
One thing startups forget is that they are still companies and they are not immune to classic problems like needing to have cash at hand, increasing revenue and reducing costs. Relying on VC funds and having hyper-growth status is incredibly unsustainable. As a startup, reducing fixed costs is essential to maintaining a budget-conscious business. By following these tactics above, you’ll be able to navigate the storm with a healthy runway and set your company up for a future of growth and success – even if a bit of turbulence might come your way.