Presented by Planful
Founders have faced a rollercoaster ride over the past few years. First, the pandemic ground the economy to a halt. That was followed by a growth-at-all-costs era fueled by cheap money and historically low technical barriers to entry, and then a talent crisis hampered that growth. Most recently a funding crunch has made cash preservation paramount. With growing global instability and capital costs continuing to rise, founders must now figure out how to extend runways beyond 2024 or risk failure.
Most have made the necessary cuts to discretionary costs and unnecessary expenses by diligently analyzing the data. But this next round of cost-cutting needs a more strategic, thoughtful approach if you want your business to see 2025.
The founder’s trap
Founders are dreamers and risk-takers, even if they don’t know it. I’ve often said that to do a startup one must have a healthy mix of naivety and arrogance, because statistically the vast majority of startups fail. Even for the founders that do eventually succeed, it’s often a brutal experience they have to go through (sprinkled with occasional fun).
The fundamental way the startup world functions, via pitches and funding rounds, creates a validation trap that many founders fall into. When securing a funding round ‘validates’ the founding team’s ideas and approach, then the funding itself becomes the primary goal. What separates successful founders is that they have the intellectual honesty to recognize that the odds are stacked against them, even the day after a new round closes.
Many economists, VCs and business leaders predict the economy may slow down even more in 2024, and at best may be similar to 2023. A grand vision for market domination might now take two, three, or even four years longer than what was planned just a few quarters ago. Smart founders are now hyper-focused on survivability, moderate growth and extending runways as far as possible because they must convince customers and investors that they have a plan to make it through.
Too many founders take a spreadsheet-based approach to cost-cutting. It’s simple math to calculate that, given your current burn rate, your bank account will dry up in X months. If you cut costs across the board by Y%, you just extended your runway by (1+Y) * X. Done.
But ruthless, thoughtless, blanket cost-cutting can anger customers, alienate workers and threaten the ability for a company to flourish once conditions improve.
Rigorous vs. ruthless
Instead of ruthless, indiscriminate cost-cutting, it is wise to be very frugal about what doesn’t matter while you continue maintaining or even moderately investing in the things that do matter.
When making cuts, never lose sight of your people. They’re anxious about the future, and you can’t expect to add more stress and excessive demands to already-stressed workers. It might be a cliché, but I’ve found that “people first” really matters. I put a premium on company culture, especially during tough times. The outright elimination of things like team lunches, in-person meetings and little daily perks creates instant animosity.
Thoughtful cuts instead create visible and tangible reminders of the current environment, especially when considering how important in-person gatherings are to sustaining a robust culture in a remote work environment. Instead of quarterly in-person employee meetups, move to annual and replace the others with a DoorDash gift card and a video meeting. Curtailing all travel — both sales calls and team meetups — not only hurts morale, it allows justifiable excuses for missed targets, lost deals and churned customers. But tightening travel policies for everyone is a very visible and effective way to cut costs while setting the right tone.
Don’t underestimate the value in making these cuts visible. I make sure my kids see me turning off the lights they constantly leave on around the house. It’s not only because electricity costs money, it’s because leaving lights on wastes money. Everyone from the c-suite on down will recognize the value of what you’re doing and how these cutbacks extend the runway, but only if everyone sees it.
Bring the data
I suggest looking beyond the data, not ignoring it. With today’s cloud-based finance, accounting, analysis and reporting tools, there is no excuse for not having a deft handle on every aspect of your business. As you search for areas to trim, the stories behind those numbers are more important. Collaboration and alignment across the business turns overall financial performance into a team sport, and data equips your team to play.
Here are four ways you should be using data to extend your runway:
- Move to zero-based budgeting (ZBB). Typical budgeting begins with a number, and teams work to spend it all. It creates the wrong incentives, promotes empire creation where higher expectations garner more resources, and instills a use-it-or-lose it incentive where spending it all is more important than saving any. ZBB rewards frugality and results. Every team begins each quarter with zero and builds up from there, focusing on results today instead of targets down the road. Note, it’s much harder for larger companies (whom you are probably trying to disrupt) to do ZBB, so instilling this approach as a startup can give you meaningful long-term advantages.
- Realign compensation. Compensation is usually aligned with budget targets and spending goals. Zero-based budgeting lets you realign compensation with results to reward people for creating more value and ROI.
- Use rolling forecasts. A limited runway can be cut short if you don’t quickly adapt. Get out of that fiscal year box and increase agility by continuously adjusting to what’s happening. Instead of sticking to that static budget you created last year, rolling forecasts let you modify assumptions and adapt plans based on whatever comes your way.
- Automate. AI-enabled automation is going to change everything. Now is the time to dramatically increase your investment in automation to drive productivity. Cutting costs requires you to do more with less. Automation uses your data to increase efficiency and productivity, which you’ll need to survive the next few years.
Start with people
Taking the “cut everything by 20%” approach to extend your runway is a flight plan for failure. Look around and start asking the right people the right questions. Give everyone ownership of trimming the total cost envelope. Find out what makes your company great, determine what matters and invest in it. Uncover what doesn’t matter, find the waste and cut it. Above all, explain ‘the why’, be transparent and be unapologetic. Your mission is the survival of your company, above all else. Later you can return to growth, and will probably be a better company for what you experienced in this survival phase.
What’s critical are your people. They’re the crew that’s going to get you up to speed on this shortened runway. If you start by cutting employee engagement, eliminating what defines your culture and ignoring the marketing and product investments that move the needle, key people will eject and you may not even make it to 2025.
Grant Halloran is Chief Executive Officer of Planful.
Sponsored articles are content produced by a company that is either paying for the post or has a business relationship with VentureBeat, and they’re always clearly marked. For more information, contact sales@venturebeat.com.
