In places like Silicon Valley, success comes in waves, fueled by innovation, market enthusiasm, and ambition. But all waves eventually break. That’s the natural ebb and flow of the tech world.
In nature, waves usually collapse when they hit the coastline and recede back into the ocean. In the startup world, waves of success are followed by contractions. A recent survey by CB Insights suggests we may be witnessing just such a period.
Fortunately there are a number of cost-cutting measures that can help startups weather it.
In the third quarter of 2015, funding for VC-backed companies was near the same level as during the dot-com boom. CB Insights reported that a new unicorn was born every four days, and financings of $100 million and higher were commonplace. Skip ahead to the next quarter, and we see the crest of the wave starting to form.
Overall investment activity in the final quarter of 2015 fell dramatically, by 30 percent, in mega-round financing, while deal activity declined by 13 percent compared to the previous quarter. It was the lowest level since the first quarter of 2013.
While it appears that the same amount of money is finding its way into the coffers of Valley startups, it’s not being distributed in the same manner. Venture capitalists are putting just as much money into tech companies, but making fewer deals.
According to a survey by First Round, 66 percent of entrepreneurs thought raising money would be more difficult in 2016. This has led some venture-backed companies to make cutbacks. Evernote axed 13 percent of its workforce in Q3 of 2015. Since then, Hootsuite, Jawbone, Snapchat, Twitter, and Tango have all cut staff.
Until recently, the common practice at startups was to pursue growth at any price, but many venture capitalists are now advising their clients to reduce costs, according to Bloomberg.
Luckily there are a number of ways that startups can keep overheads low. Doing so at the beginning of any venture will pay dividends in the years to follow. And when the waves of success again begin to grow, those companies will be in a better position to ride them all the way to shore.
Stay Virtual For As Long As Possible
Reducing fixed expenses like office space and furniture will help keep costs low in the beginning. There are innumerable ways for employees to work remotely.
Many companies use e-mail and programs like Slack or Skype to communicate, while Dropbox is great for sharing files, Trello works well for managing projects, and Evernote can be useful for distributing documents. These are just a handful of the products that are available.
Eventually, a company will need to hire more people to help handle growth. Only then is it time to start looking into investments like real estate, desks and chairs.
Track Every Single Expense
This might seem obvious, but it’s very easy for spending to spiral out of control. Charges pile up fast, and if they’re not checked it becomes hard to get back on track.
Keep meticulous records. Not only will these help in the event of any legal troubles, but they’ll make life much easier during tax season. With the proliferation of cloud technology it has become easier to integrate systems. Online inventory management can work in tandem with bookkeeping software and lets you keep a handle on expenses, payroll and other costs.
Prioritize Startup Costs
Items that are integral to operations, like computers, office supplies and business software, are the highest priority. But look at where the company might be able to save money.
Is it necessary to pay for a subscription-based billing service now? Is it crucial to hire that particular programmer? It’s a good idea to figure out which costs can wait until later.
Offer Equity In Lieu Of Salary
It’s not always easy to lure the brightest talents. Many of the best programmers, designers and engineers are already working somewhere else. Most startups don’t have the capital to come out of the gates with big salary offers. So how does a company attract top-shelf employees?
Writing for Inc.com, AJ Agrawal, co-founder of Alumnify, says it’s a good idea to offer equity to early hires. Shares in the company replace the salaries they could find elsewhere.
Agrawal says that many entrepreneurs are so protective of their equity, “they refuse to
use their option pool in their early stages.” That just means they end up with a huge pile of shares in a worthless company.
Put the “Minimum” in Minimum Viable Product
“If you’re not embarrassed by the first version of your product, you’ve launched too late,” LinkedIn founder Reid Hoffman is reputed to say.
His point is that if a startup wastes time and resources when bringing its initial product to market, it will get left behind. Another firm could beat it to the punch, or user feedback might dictate some major adjustment. Either way, all those hours and dollars will have been wasted.
Create a product and get it to market so data can be collected. Startups are looking for product-market fit as quickly as possible, and wasting time and money on the first iteration can be a costly mistake.
Hiring contract professionals rather than employing an in-house dev team can save money in a number of ways.
First, the team members aren’t using up floor space in an expensive office somewhere. They’re working remotely, just like the company’s founding team should be. Freelancers also tend to be cheaper than staffers. They don’t require insurance or benefits, and they don’t collect pay during downtime on a project.
Keeping costs low in the beginning will help startups weather the stormy days that are sure to come. Waves rise, break and recede in a repeating cycle. But if startups can manage their finances properly in the beginning, they’re more likely to ride those waves all the way to the shore.
If your startup is looking to cut costs, Gigster can help.