Startups: Cut Costs Yesterday, But Be Strategic

2023 was the year of efficiency. For a lot of companies globally, and certainly in Israel as well, that seemed to mainly mean reducing headcount – something that was to an extent simply a required natural correction after the excesses of 2021 and early 2022. 

In general, correcting the excesses from that period is something that should be viewed positively; in over a decade and a half of reviewing thousands of startups, 2021-22 was notable for me for its trend away from basic economics and to ridiculous facades. I’m glad to see that gone. It’s now time for founders to take the next steps to adjust to the current reality.

In 2024, it’s imperative that companies, and startups especially, take a thoughtful approach to cutting costs. It’s especially vital in the Israeli hi-tech ecosystem due to the uncertainty of the current domestic situation, but it’s important everywhere in the world for companies that want to ensure the long term health and stability of their business. 

Cut Costs Even If You Have Cash

AI could create change in unpredictable directions, geopolitical drama is probable this year between wars and significant elections in a number of countries, and there are conflicting opinions about how the markets are going to evolve. Bottom line: Even if you’re cash comfortable, confident and beloved by your customers, you need to increase efficiency and cut costs. 

For a long time, growth has been the main metric according to which companies are judged, and that’s been especially true of startups, whose success has been measured by how quickly they are able to grow customer base and market share. Now attention is shifting to efficiency. It makes sense; in terms of profitability and stability, it’s often easier to move the needle through efficiency improvements. Plus, this can increase predictability. Now that this is a KPI, you need to make sure your business doesn’t fail the test. 

Beyond this bigger picture, for startups cutting costs is even more crucial because at times like these you have to ensure that your runway is as long as you can make it. When you’re in a marathon rather than a sprint, it doesn’t matter how fast you are if you don’t have stamina.

A mistake that startups often make is to wait until they feel pressure before taking the necessary cost-cutting steps. One of the most valuable things an experienced investor can do for a startup is to tell them clearly when they’re making this mistake, introduce them to founders who’ve learned that lesson already, and help the company to adjust. 

Sometimes you need to invest a certain amount of money in order to be able to save far more long term. Other times, it might take a while before you’re able to see the results from the measures you’ve taken. In either case, if you’ve waited too long to move, you might not have the time you need to get the results that are suddenly urgent for your business. 

It’s very easy for startups to fail simply because their executive team wouldn’t take the steps they needed to extend their runway for just a few extra months – and turns out to have been the crucial make-or-break period. 

Consider a Range of Cost-Cutting Strategies

There are many different methods you can use to cut costs, and companies should consider the full range.

Here are some examples of strategies you can take to increase runway:

• Cut salaries, including for a temporary, defined period. 
• Furlough, especially if there is some governmental scheme which can support employees who take this option. 
• Debt can be an option in some cases, if what you need is a small boost and your company is in a position that strikes a bank as reliable.
• Internal round. If you need to bridge a gap after which you know more funds will be coming in, deals closing, etc. then a small internal round from your existing investors might make the most sense.
• Pensions and benefits. Many startups offer far more in the way of benefits than is required by law. If you’re in a tight place, this might be worth reconsidering, even for a short period of time. 
• Government grants, and other grants like emergency funds or innovation awards. Depending on your field, these may be lucrative, prestigious, or both. 
• Try to change payment terms with clients. Clients can sometimes be receptive to alternative payment models, such as paying more upfront. If you have strong relationships with your customers, strategies like this can be a good way for appreciative customers to show faith in the business. 
• Give back office space. During the boom time of 2021, many companies opted for larger office space than they needed, and those spaces can become a millstone around the company’s neck in times of efficiency. Smaller spaces, office-sharing, or shared work spaces, are all options worth considering. 

Be Strategic, Not Scattershot 

Not every cost-cutting strategy is appropriate for every company. Most startups that succeed in this opt for a mixture of things that work for their stage, culture and business model. The important thing is to think it through thoroughly as a strategy from the start, rather than take unconnected steps that may not do what you need or contribute to the overall strength of the business. 

If your employee motivation and trust is high, then a transparent approach to salary reduction that has executives taking a larger cut and which is presented as a sacrifice that is greatly appreciated and essential for the business’ stability and success may be a fit. If you know that morale is low already, and you’re concerned about flight risk relating to vital employees, then it’s probably not the right step at this time. 

In the same way, debt or an internal round are particularly worth considering if you have a specific need and defined goal for them. If your equipment needs updating in order to allow the company to double its production, for example, and you have customers waiting for the increase, then the investment may make sense at this time if the increased business would pay for itself soon. 

Cost cutting measures should support your broader company goals, just like everything else. Don’t demand a huge amount of effort from the one team in the company that’s already under huge pressure to deliver before a deadline at the end of the quarter, for instance. Don’t undermine the customer support team by cutting their tools when client relationships are key to your success. 

Cut Costs Your Way. But Make the Cuts.

Don’t feel pressure to copy the way another company is finding their way to efficiency, even if that company is in the same industry you’re in. Work out what makes most sense for your business, your employees, and your customers. 

Equally – don’t put it off. Even if it’s painful now, it’s better than the risk you incur by not making these essential and mature decisions now. 

Doing it right, at the right time, will leave your business healthier, stronger and better prepared for the future, no matter what it has in store.