10 Ways to Preserve Cash as a Bootstrapped Startup
A guide to staying alive for early stage companies short of money.
As a startup founder, the term "runway" has an entirely different meaning than what most people think of when they hear the term. For those unfamiliar, runway refers to the amount of capital on hand before a startup goes bankrupt. Usually, the runway is measured in months.
For bootstrapped startups (meaning ones without venture capital funding) running out of runway can be a serious problem that limits the decisions leadership can make. Fortunately, there are strategies bootstrapped startups can implement to save money.
1. Reduce operating costs by working remotely.
For anyone who has calculated important business metrics like CAC (customer acquisition cost) or CTS (cost to serve), you will know just how hard it is to reduce fixed operating costs. One way to alleviate these costs is by creating a company that employs remote workers. Rather than needing to provide workers with office space, computer equipment, snacks and coffee, founders can avoid these money draining costs.
According to a Gallup poll on the state of the American workplace, 31 percent of employed Americans work remotely 80 to 100 percent of the time. This is a 7 percent increase compared to findings from four years ago. In short, working remotely is a phenomenon embraced by businesses and employees alike. It can be a great tactic for reducing overhead and therefore preserving cash.
2. Make frugality a company value.
In the mid-1990s when Amazon was just getting started, Jeff Bezos and crew worked on the floor in a 400-square foot warehouse. Bezos and his team decided that they needed desks, but being the frugal and resourceful entrepreneur that he is, Bezos decided to build desks out of doors and four-by-fours rather than purchase expensive office desks.
Today, Amazon lists Frugality as one of the company's 14 core values. To perpetuate this value, Amazon gives out the Door Desk Award to recognize employees who save the company money in smart and sustainable ways.
3. Prioritize profitability over growth.
Today, both public and private companies tend to prioritize growth over profitability. Founders of all kinds are constantly in search of the hockey stick graph that shows all numbers moving up and to the right on a steep slope.
But growth has its costs -- one big one can be profitability. For founders struggling to preserve cash, switching to a business model that leads to profitability sooner rather than later may be a smart decision. Venture capitalist Fred Wilson wrote that biasing toward profitability can also improve business decisions generally: "I also think the profit motive, generating more revenues each year than the expenses you are spending to do that, is a really valuable constraint on a management team. It forces them to think creatively and logically about the investments they want to make."
4. Take advantage of tax breaks and incentives.
Some states have recently created tax incentives to encourage innovation. Founders should be sure to spend time researching what tax breaks their business may qualify for to preserve cash. In New York State, for example, startups that open an office on or near a college campus may be eligible to operate tax free for 10 years.
In addition to tax incentives, some government agencies such as the Small Business Administration (SBA) offer grants and seed funding to startups working on exciting research projects. According to its website, the organization has contributed more than $2 billion to startups working on promising ideas.
5. Only hire top talent.
All-star employees can handle the workload of 1.5 or two normal employees. Therefore, it may make sense for founders to focus on hiring top talent. While supremely talented employees may command top-dollar, it can still be more cost effective to hire fewer but more talented employees. For founders who are strapped for cash, many early hires are willing to accept stock options in place of high salaries. This can be a good short-term strategy to preserve cash while attracting top talent.
6. When possible, hire contractors instead of full-time employees.
Freelancers or contractors provide businesses with a more scalable workforce. As a bonus, these employees usually don't expect the traditional benefits businesses must provide when hiring full-time employees.
Even Facebook and Google, companies that have plenty of cash on hand, have recently hired armies of contractors to manage various important tasks such as online moderation.
7. Build an amazing internship program.
Interns, as opposed to full-time employees, are less expensive to hire and require fewer benefits. They can also make a meaningful impact on your business. If founders time the hiring process correctly, they can land a few highly talented interns from top universities who will invest months of their time in exchange for experience, strong mentorship and good recommendations.
Founders interested in hiring interns to reduce costs should ensure they have a strong pipeline of candidates by doing some recruitment marketing. Once hired, it's important that interns go through a thorough training program to ensure they will be productive as quickly as possible.
8. Delight customers to create word of mouth.
New customers referred to your business have very low acquisition costs. Businesses such as Dropbox and PayPal could rely on word-of-mouth marketing to attract new customers because it was highly cost effective. As a result, both companies were able to scale effectively while keeping acquisition costs low.
For founders interested in developing word of mouth, a great way to begin is by creating delightful customer experiences for existing customers. By going beyond to "wow" customers, founders are planting the seeds of new business.
9. Master organic search to reduce CAC.
Customer acquisition cost or CAC is one of the most important metrics every business must grapple with. The higher CAC is, the harder it will be to preserve cash and scale the business in a responsible way. However, the lower CAC is, the easier it is to make a profit and to, therefore, invest more in attracting new customers.
A great way to lower CAC is by mastering organic search as a marketing channel. Unlike other mediums such as paid search, display ads or paid social media, an organic search strategy can be successfully operationalized on a limited budget.
To get started, founders should consider implementing the "skyscraper technique." Using this strategy, marketers produce content that targets increasingly short tail keywords to grow awareness, traffic and ultimately, customers.
10. Monetize content just like Airbnb.
During the early days of Airbnb, the company was struggling. In need of cash, founders Brian Chesky, Joe Gebbia and Nathan Blecharczyk came up with a side project to make some quick cash. During the 2008 presidential campaign, Airbnb released Obama O's and Cap'n McCain's -- cereal boxes that were sold for $39 apiece. The company sold 1,000 boxes of the commemorative cereal and made enough money to continue working on the business. Today, Airbnb is valued at $31 billion.
Cash strapped companies can consider creating an on-brand side project that allows the business to create cash flow while helping to spread awareness of the company's main product offering.
The early days of any new business can be financially trying. For founders hoping to preserve cash, there are a few different tactics that can be implemented to save money while growing the business responsibly.
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