How to Keep Costs Low and Increase Runway for a Small Startup
Startups often end up spending a lot of money as soon as they raise a round competing with other more stable companies. While it’s important to attract and retain good talent, I strongly believe there are ways to do that without overspending while still being a company that your team loves.
I co-founded Trance, an online mobile community for dancing, 6 years ago with 2 co-founders. We’ve hired 10 people and only raised a total of $1.26 million over the last 5 years. That’s a really low burn rate given that we didn’t have other sources of income or revenue. I handled budgeting and operations among other roles in product and content and want to share some tips on how to keep your costs low.
Some of you may view this as “dragging your runway” but this article isn’t about whether you should or shouldn’t cut costs. It is about ways you can reduce cost if you choose to outside of the obvious one of cutting team size.
- Use services that are low-cost whenever you’re doing something that you know many other startups have had to do.
There are lots of tools you can use to keep your costs low from the beginning that involve the day-to-day operations of the company.
- Incorporating the company: If you’ll be a typical startup, that is, a Delaware incorporated C-corporation operating in California, use Clerky, Inc. to incorporate at about 1/3 of the cost of using a legal firm. The documentation for incorporating is pretty much the same if you aren’t deviating from that definition of “a typical startup”. You may want to talk to a lawyer from a strategy perspective at this phase, but this can cut out a lot of cost from a paperwork perspective.
- Paying employees: You don’t want to spend hours figuring out laws around payroll and how to pay your employees. Use a service like Gusto. Its base price is $39 per month with $6 per person that you run payroll for.
- Managing accounting and taxes: This one is a little bit trickier. While maintaining your books monthly has cheap options like Intuit QuickBooks, it’s doing your annual federal taxes correctly that ends up increasing that cost. The way I think about it — accounting and preparing your federal taxes should cost you roughly $5000 a year. I have used some services in this space but I’m yet to find something I truly enjoyed, so please let me know if you can vouch for something here, whether it is a service or a specific person or a mix of the two.
[Note: I am not getting paid to promote any of these services, the ones I mention are ones I genuinely liked.]
2. Don’t get your own office space unless your team is nearing 10 people or more. Use a co-working space.
We made this mistake. We got our own office when our team became 6 people. What we didn’t realize is all the additional costs outside of rent that come up that you don’t plan for. Like daily or weekly cleaning, or fees you get charged when you aren’t separating your trash properly, or a break-in. (Yes, that happened to us before we got our business insurance. Costly!)
I’ll admit, co-working spaces aren’t exactly cheap. What I’d suggest is relying on your network when you’re thinking about getting office space. A lot of other people or companies often have extra desks that they think about renting out only when someone they know asks. This only works when you ask for a relatively small number of desks.
Additionally, when you are a small team like 6 people, it usually isn’t enough to feel a sense of community and it helps to have other people around. Using a co-working space is an added benefit that helps the team feel more connected to a bigger community.
3. Do not cut out team morale budget, just be wise about it. This will reduce your overall costs around hiring.
We were able to retain our talent really well and part of it is because of how we treated the team and each other. Team morale and outings are often the first thing that gets cut out of the budget but I cannot stress this enough - you need to budget for your team. If they aren’t enjoying being part of the company, they have lots of higher-paying options they can go to. Which would mean you have to hire for that role again and that is once again, costly.
So how can you make sure you are creating great team culture while keeping your spending low? Remember Groupon? It is your friend here. There are lots of activities you can purchase on a budget on Groupon. Escape room games. Indoor skydiving. Karaoke rooms on weekdays. Eating out at restaurants which would have been more expensive otherwise.
Additionally, keeping a few card or board games (if your team is into that) is a great and cheap way to have fun and bond over lunch.
If any of the co-founders are comfortable with having the team over for dinner and enjoys cooking for a crowd, that’s also a very personable way to create culture without high cost.
Your employees also need to feel that they are developing professionally to want to stick around. For this you could create a list of high-quality resources that are free or cheap. For instance, we relied on some online courses from Stanford University to help our developers. We also created a book club among ourselves discussing books like The Lean Startup by Eric Ries or Zero to One by Peter Thiel.
4. Pay for business insurance to save on unpredictable costs.
Things getting stolen seems to be quite an issue in San Francisco in particular. Even though business insurance might seem like money that’s just leaving your company account, it might save you for sudden costs like having to replace company computers when you didn’t have a planned budget for it. We had an office break-in that was very costly, and once we got business insurance, I know it saved us money for other thefts that occurred. CNA is a company I specifically liked working with.
5. Reduce marketing spend by lowering your cost to acquire customers instead.
When you’re considering how many new users you want to bring in, make sure you aren’t just allocating money but are being efficient about it. For example, if you need to bring in 200 new users per month, you could budget $2000 because your cost to acquire a user is $10. However, if the effort to reduce that cost of acquisition is low, you should really look into that.
We had image-based Facebook ads that cost us $15 to acquire a customer. We changed to a short video ad and iterated on the wording, and believe it or not, our cost went down to under 50 cents. Now we can either get a lot more users for the same budget, or we can reduce the budget if we are only looking to bring in the same number of users we originally planned.
[Note: This is likely more for the B2C space and not B2B.]
6. Be smart about spending on food as this affects your health and productivity.
This is an interesting balance you can make between being healthy, how much you spend and the amount of food you provide.
We had budgeted for our team to get food at restaurants nearby twice a week. Many companies feel this pressure to provide lunches for everyone because so many others do it around the San Francisco Bay Area. At one point my co-founder calculated that we could take the cost of one of our restaurant meals and use that same budget to actually get healthy food like fruits, salad and sandwich supplies, delivered from Costco that can be used to feed the whole team for 4 days of the week. At the same cost, everyone gets healthier food, we create a sense of community where we all eat together for the most part, and everyone feels that their wages don’t end up getting spent on lunches. While we didn’t save money here, it was more about us eating healthier in the process and thus being more efficient in our work that day.
[Note: This method of using Costco may not work if your team starts to become larger than 10 people.]
These have been useful to me and my team, and I hope some of these are helpful to you too. Feel free to leave a comment if you have more thoughts and ideas.
