Y Combinator recently warned that the good times may be coming to an end for startups and the venture market in general.
“No one can predict how bad the economy will get, but things don’t look good, ” YC wrote in a letter sent to its portfolio founders this week titled “Economic Downturn.” reported by TechCrunch.
“The safe move is to plan for the worst.”
Managing your startup in an economic downturn is like riding a roller coaster. There are ups and downs, surprises, celebrations, and disappointments. The difference is that for a roller coaster, it feels like a journey, and for your business, it feels like an up-and-down struggle to survive. But if you get moving with a few steps now, you can ride these waves of uncertainty instead of being swept away by them.
It’s not all doom and gloom, here are some things you can do to ride the wave of an economic downturn and keep your startup afloat:
1. Get Creative With Cost-Cutting
You're a startup, but that doesn't mean you have to be a startup of the past. If you're planning to survive the economic downturn and thrive when it's over, you need to get creative with cost-cutting. With the economy in a downturn, it's more important than ever to keep your startup's costs under control. Here are some steps you can take today to keep your startup's costs down:
Consider moving to remote work to cut office overheads. One of the first things to consider when cutting costs is how much office space you need—do you really need an office at all, or can you get by with your team working from home? Going fully remote means reducing or eliminating high office space rental costs and equipment costs like printers and furniture. Going remote also has the added advantage of allowing you to expand your talent pool outside your area.
If you're looking for temporary help filling vacancies, consider using freelancers. First, make use of your network - ask around on LinkedIn for recommendations for a few good freelancers or temporary staff members. Some of these people may have valuable skills that you can use for certain projects or roles within your business. This can help you keep your job roles flexible and also bring in extra revenue by hiring an expert for a specific task. Some freelancers are willing to work on an ad-hoc basis, keeping you flexible and nimble.
Look into any grants, subsidies, or tax exemptions in your area. Can any grants be applied for? Do you know about any subsidies or tax exemptions in your area? Have you checked your local government’s website or tax center for this info? These considerations may help you look at your business from a new perspective, which may result in some innovative ideas for saving and getting funds. Consider these 25 Tax Deductions for Small Biz if you're in the states. If you're business is based in Australia, you can now save big on Cake with Australian tax breaks, which means that for every $100 you spend on your subscription, you get a $120 cashback. Amazing, right?
Can any people costs be moved to options from cash?
Sometimes you can extend your runway and cut costs but paying for things in equity, or options. Advisors will often accept options, especially when cash is tight. Some team members will also accept options instead of salary which can help you maintain your team and keep ahead of your competition. Be careful that you follow employment laws but there are creative ways to do this!
Consider your subscriptions/software costs and ensure you're getting your money's worth — remove what you aren't using or downgrade plans if possible. Are there any subscriptions or software that you aren’t using regularly and could get by without? Now is a great time to shop around for new solutions that may be more in your price range. Check out some of the best ESOP management tools for startups—these are all excellent tools for managing your benefit plans, with varying features and prices. Pro tip - save on legal/accounting fees by using Cake to manage your raise and employee stock option plan instead of paying lawyers and accountants thousands of dollars each year!
2. Keep your existing investors sweet
One way to keep your startup on track during an economic downturn is to ensure that your investor relationships are strong. When times are tight, you need to keep track of every dollar in and out, and communicate this clearly with investors, advisors, and employees. Below are some steps you can take:
Keep investors up to date. Communicating with investors can be tricky during an economic downturn because they may be dealing with uncertainty themselves. It's important that they know what's going on at your company, though, so they can make good investment decisions. Cake allows you to send out updates quickly so that everyone can read at once without worrying about replies getting lost in an inbox somewhere or forgotten due to busy schedules.
Investors that are kept up to date can and will help more readily than investors that are kept in the dark!
Let employees know their options are safe. If employees have questions about their options, you should let them know what's happening in clear language, so they don't feel like they have to worry about losing their jobs or benefits. You can send out employee communications via email or on Cake.
Be sure to help employees know what their options are worth, and what they can do to help increase their value. If there is the possibility to seel options in the near future, let them know as this can be inspiring for your team.
A team that is aligned around ownership will be more aligned, engaged and motivated to pull through!
Clean up your cap table. Keeping track of who owns what in a startup is not easy. You have to keep track of all the different share classes, vesting schedules, and stock options, among other things. For lots of startups, this is done on traditional spreadsheets. But spreadsheets are hard to update, difficult to share, and hard for employees to see where they fit in the scheme of things. Cake makes managing your cap table much easier by automating updates, providing transparency for employees, and making everything visible in one easy to use dashboard. We’ll even take your existing messy files and get them set up on Cake - for free. So, get it off a spreadsheet and on to Cake.
3. Raise Cash Innovatively
It’s no secret element that most startups mainly rely on venture capital (VCs) investments, and VCs may be reluctant to fund during an economic downturn.
The market is cyclic; usually, there's a subsequent boom after an economic crisis. As we all know, VCs are looking for opportunities in most cases. So why not remind them that this is the best time to invest since they're set to earn big when things turn around. Make sure to communicate to your investors that now is the time!
Also, consider raising money through crowdfunding — a project-based funding approach, where you raise money from many people, usually the public (crowd), hence the name crowdfunding. Crowdfunding can increase exposure to investors and help cultivate the brand love all startups covet. Robin Holt from Birchal writes,
“Traditional sources of finance may come from individuals or entities who only have an interest in investing to generate a return. While this is an interest of the crowd, the crowd attracted will likely support companies because they want to support the brand/company and have a desire to see the brand become well known and their revenues grow. The broad range of investors can also result in the business making valuable new connections and further growing the business through this network.”
While difficult economic times may ebb and flow, there is always opportunity abound. The future belongs to organisations that think outside the box. Just remember that what doesn't kill you makes you stronger, and we’re here to help guide your business through troubled waters. Cake is easy to use and free to set up. Get in touch with us today and see how you can easily get started.
Learn more about crowdfunding in action in a case study, here.
Finally, instead of raising cash, you can also consider using founders' own funds to sustain the business for some time, a technique usually known as bootstrapping. Of course, you should know what, when, and why to use bootstrapping to fund your startup.
Looking for more? Check out our blog for more insightful startup hacks, tips, and tricks.
This blog is designed and intended to provide general information in summary form on general topics. The material may not apply to all jurisdictions. The contents do not constitute legal, financial or tax advice. The contents is not intended to be a substitute for such advice and should not be relied upon as such. If you would like to chat with a lawyer, please get in touch and we can introduce you to one of our very friendly legal partners.