Six Financial Moves to Determine Whether to Grow, Cut, or Sit Tight
March 6, 2023
It’s hard to read the news lately and avoid hearing about layoffs. Amazon, Twitter, Microsoft, Google, Facebook, Salesforce, and PayPal are just some of the many companies in tech and other industries that have shed more than 200,000 jobs over the last year, according to layoffs.fyi. And given the impact these big, public companies have on our economy, it’s no surprise that we’re seeing a ripple effect of these layoffs on smaller companies.
What Big Layoffs Mean for Startups
If you happen to be hiring, these layoffs mean there’s now a growing pool of high-quality talent you can tap. Though established enterprises may be minding their cash by cutting headcount, smaller companies are using those cuts as an opportunity to upgrade talent.
And if you’re thinking about launching a startup, you’re in good company. A down economy can be a great opportunity to introduce new solutions and business models. Maybe that’s why new business formation right now is the strongest it’s been in decades (fun fact: Propeller itself launched after the 2007 economic downturn!)
But another impact of these big-company layoffs is… layoffs at startups, too. During the bull market, many companies were following a grow-at-all-costs playbook: flush with cash raised at historically unprecedented valuation multiples, they went on huge hiring sprees. Now, in response to investor pressure and a return to rational thinking, many of those same companies are trying to cut their way to profitability.
How Startups Should Think About Layoffs
So: what should you do if you’re a startup that’s feeling the pain of an economic downturn, worrying about profitability, or wondering if you’ll be able to raise funds this year? Here are some smart financial moves that can help you figure out whether to grow, cut, or sit tight.
1. Look backward to look forward
We’ve just passed year’s end, which makes right now the perfect time to conduct a retrospective review. Sit down with last year’s numbers and take a sober look at what’s going right in your business, and what’s not. How are you making money? What’s gotten you to where you are now, and will that work for you going forward? Reviewing what you did in the past and the results it generated gives you data points to consider when you look forward.
A worthwhile exercise is to start with zero-based budgeting: If your last budget started with 2022 actuals, wipe the slate clean and only add back people and expenses you truly need to either get to profitability or to a “default-alive” position. This forces your teams to justify and prioritize each of their expenses, rather than assuming that they will continue. You should allocate resources to activities that are the most important and work your way down a stack-ranked priority.
It’s not uncommon to see growth-obsessed companies with healthy and sustainable business units operating alongside unhealthy ones. In situations like this, “default-alive” might mean shrinking or slowing down to survive. For inventory-based companies, expansion into new channels and new products is notoriously capital–intensive because you need to build inventory and receivables while also investing margin in distribution and marketing to drive velocity. Killing or pausing a roll-out might actually help you free up cash and focus all your resources on fewer things.
2. Find a Fresh Set of Eyes
Most startups are already prioritizing their expenses, and cutting costs that are not essential to the business. But founders often neglect to look at the foundations of their business operations. While it’s easy to take the fundamentals for granted — the way you might assume personal expenses like insurance, mortgage/rent, or car payments are non-negotiable — it’s important to review these costs on a regular basis. When you look at your expenses, don’t be afraid to ask the hard questions: Is this essential for business operations? Will this be revenue-generating going forward?
Reviewing your fundamentals with a financial advisor in the room is helpful because they can take a more objective perspective. Propeller Industries teams, for example, are both insiders (we know our clients’ books like the back of our hands) and outsiders (we see roadblocks and macro trends our clients might not). At times like this, objectivity and multi-company perspective can be a helpful voice at the table if tough decisions need to be made.
3. Know Your Metrics
As a founder, you have an obligation to really know your business — that means metrics. Understanding your metrics doesn’t just mean you can put them on a slide for your board — it means you feel comfortable speaking to them and what they tell you about your business and getting the key members of your team laser-focused on them. Developing this understanding builds trust and confidence for you, your team, your investors, and your customers. Here are the metrics you should be tracking consistently:
- Growth Metrics (ARR, MRR, New Customers, Repeat Customers)
- Efficiency Metrics (Burn Multiple, LTV/CAC, Revenue Per Employee)
4. Do some scenario analysis
Using scenario analysis, those “what if we…” questions can help you make data-driven decisions about your future. Discontinuing your Netflix subscription won’t extend your runway from 29 to 36 months, but you can figure out what might. What would happen if you downgraded your office space? Do you need the Cadillac of software, or can you get it done with the Chevy? Have humans been doing things that can be automated with technology? Could you save by outsourcing certain functions, like finance, HR, or demand gen?
For example, one of our clients is thinking about creating a new line of business. This would create a new source of revenue, but it will also require an investment of resources. Is the theoretical revenue greater than the theoretical investment cost? And over what time period? New revenue streams are cash-intensive, and typically don’t provide enough cash flow in time to make an impact. These are the kinds of questions a financial team doing scenario analysis can help you answer.
Now is the time to take a step back and find a way to grow a little more slowly with a lot less money. Organic growth means reduced capital expenditures and higher ROI. It may take longer to hit your revenue goals, but you may find that you can delay or eliminate the need for outside capital by slowing growth.
5. If More Funding is an Option, Be Prepared
If you were hoping to fundraise this year, then you should be getting your house in order. The honeymoon for inflated valuations is officially over. VC funding in 2022 was down 35% YoY, but investors are still sitting on billions of dollars waiting for the right deal. Many of them will be looking not just for unicorns but for companies with strong financials and a fundamental understanding of their business. They’ll expect you to back up up your numbers, so you should know yours by heart. In addition to the metrics we mentioned earlier, prepare your org chart and the value each employee brings, your 12-month plan, and your three-to-five-year forecast.
If you raised capital in the last 36 months, be prepared for a very different environment. Investors care as much today about diligence as about growth, and they want someone else with a finger on the pulse, so expect VCs to challenge you on these numbers.
6. If Layoffs are Necessary, Be Smart About It
Once you know that layoffs are the right option, act quickly and decisively. If you’re facing six months of runway, then waiting three months will not give you enough leeway to restructure and save on financial losses. You can also provide better severance and exit benefits for the people you let go if you’re acting from a position of greater financial health. And, cut a bit deeper than your conservative models show – the last thing you want to happen is more than one wave of layoffs. That signals to employees and investors that your business is struggling and unable to provide stability for the long-term.
Downtimes Are Good Times to Challenge Your Thinking
No matter where your business is headed in 2023 and beyond, make sure you’re doing everything you can to squeeze juice from the lemon. Tough times force people to make tough decisions, but when you challenge your thinking, you can be a more creative problem-solver and innovator. It’s always more expensive to earn back trust than it is to avoid losing it in the first place, so be transparent with your teams, customers, and stakeholders.
Remember that layoffs aren’t inevitable, and research shows they’re often more contagious than they are effective. If you need help with your next move, our trusted advisors can guide you in making thoughtful decisions, effectively managing your finances, and taking the long view.
Reach out to us to help guide you in 2023.