Startup Strategies for Reducing Costs & Bringing in Capital
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.
- 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
- 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
- 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
- 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
Economic Injury Disaster Loan
Local Program and Tax Benefits
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.
Burkland offers expert CFO services, accounting services, and tax services to startups across the USA. Please reach out to us to learn more about what we can do for you, or if you have questions about federal, state, and local resources available in response to the COVID-19 outbreak.