Article 3 of a 3-Part Series
COVID-19 is affecting startups in many ways. This blog post on reducing costs and bringing in capital is the third and final post in a three-part series focused on recommendations for startups during the COVID-19 crisis.
In the first post, we focused on scenario planning and ended with how VCs are now advising startups to extend their current runway to 24+ months, regardless of when they last raised capital. In the second post, we focus on the “how” – forecasting, modeling, and waterfall analysis. This post focuses on strategies for reducing costs and bringing in capital.
Strategies for Reducing Costs & Bringing in Capital
There are many cost reduction strategies to choose from at a time like this. We have considered the possibilities and narrowed everything down to these key areas and recommendations at this time. The financial situation related to COVID-19 is very fluid, please check-in to the resource center for updates and contact us for advice.
People Cost
- Delay new hires
- Don’t backfill
- Freeze pay raises and discretionary bonuses
- Consider pay deferrals, pay cuts, furloughs and terminations
- Consider offering equity in lieu of bonuses/pay raises or to offset pay cuts
- Value of optionality: contractors vs. new hires
Working Capital
- Explore options to tightly manage receivables and expedite collections
- Evaluate customers financial stability and creditworthiness; re-negotiate terms as necessary
- Explore options to slow payments to vendors. Some vendors are offering hardship options for subscriptions (e.g., Gusto)
Bring In Revenue & Minimize Churn
- Consider offering options to customers to prevent churn (e.g., pauses, downgrades)
- Focus on getting paid upfront; see if you can negotiate longer pre-payment terms in exchange for discounts
- Consider offering deeper discounts for a few key deals
- Consider offering more flexible terms
- Consider increasing the value of what is offered at each pricing tier
Fundraising
- Plan for six-month lead time to raise capital, and anticipate the likelihood of smaller round size and lower valuation than previously anticipated
- Will be more challenging to bring in new investors; reach out to current investors for additional investment
- Explore potential to qualify for SBA loans and submit applications ASAP
- Request principal deferment from existing lenders
- Explore venture debt options
Other Expenses
- Much of spending will be eliminated during the shutdown period and is likely to be lower for the balance of the year
- Consider canceling participation in events for the balance of the year
- Landlords accommodating rent abatement/deferment requests
- Review spending on SaaS software tools and negotiate a lower pricing tier for hosting services
- Be careful about marketing spend • Explore stimulus tax deferment opportunities
- File for R&D payroll tax credits
COVID-19 Stimulus Resources
We are regularly updating the Burkland COVID-19 Resource Center. Here are critical articles on federal and state programs to help your startup:
Paycheck Protection Program
Update 4-9-2020: Treasury Department Clarification for CARES Act
Update 04-02-2020: Paycheck Protection Program Latest Developments
17 Things to Know About the Paycheck Protection Program Loan
Economic Injury Disaster Loan
How Do I Get a Quick Infusion of Working Capital for My Startup During COVID-19?
Local Program and Tax Benefits
COVID-19 Related Tax Deadlines
I Need Help Paying My Startup’s Loans During COVID-19
Federal Cash Tax Benefits Available to Startups Impacted by COVID-19
Read other articles in this 3-part series: The first article focuses on scenario planning. The second article focuses on the “how” – scenario planning, modeling, and waterfall analysis.