Getting Through Without Layoffs: A Guide for Startups

Don’t make the long-term mistake of laying people off to handle short-term cash crunches. Even during a crisis, this is a critical error for startups if you haven’t exhausted all other options. While you gain a bit of runway in the short term, you risk cutting yourself off at the knees for recovery and growth opportunities both through and after the downturn. This is doubly true for early-stage startups, where your creativity and innovative thinking is usually worth more than your product at this point.

While early-stage startups likely won’t face the same brand recoil as big companies that announce layoffs, the real pain for startups is the loss of momentum and creativity. That alone could be a death knell.

But you need to keep the company alive - so what’s a founder to do? We’ve compiled 12 ways for founders to weather the storm without layoffs, broken down by ways to increase revenue, decrease costs, and look for other cash infusions.

Generate more short-term revenue

In times of strife, look for creative ways to get more of it.

Get more from current customers

A common sales tool you can leverage is payment terms and conditions. Two big levers you have here are:

Encourage longer-term contracts (2-3 years instead of only one).
Encourage annual payments up front so you get more revenue in the door now.

The most popular way to incentivize these behaviors is discounts - give customers a price break if they pay up front or commit to a longer-term contract. You could also apply this strategy to cross-selling and upselling, offering additional products and services at a temporary discount to encourage buying.

However, be careful. As with all discount strategies, you don’t want to devalue your solution or make your unit economics negative.

Add a retention bonus for renewing customers

As many customers are looking to cut non-essential costs, make it a value-added win for companies to continue working with you. This might mean giving them an additional feature for free on their renewal, a discount, or something similar.

With this strategy, make sure your retention bonus is:

Temporary.
Explicitly tied to renewal.
Doesn’t significantly add to your cost base.

Look for alternative uses for existing infrastructure

Just like many manufacturing plants are temporarily converting their facilities to make masks or ventilators in response to COVID-19 shortages, see what your infrastructure or product can be used for with little to no change.

A famous historical example is Arm & Hammer. Originally marketed as a baking product, it was not until their pivot into deodorizers (which led to cat litter, deodorant, and more) that the company got a new lease on life and multiplied profits. For more inspiration on this, take a look at April Dunford’s book on product positioning called Obviously Awesome.

Redirect “non-essential” employees to new revenue lines

Immediately redirect all “non-essential” employees to a temporary team called “new revenue lines.” Someone can become “non-essential” as soon as their existing day job scope becomes smaller or eliminated, for example a customer success person after multiple customers churned or a developer after a new product launch got shelved.

One example of this in action is Dan Price’s company Gravity Payments. He became famous for instituting his “$70k minimum wage” in 2015, but in response to the COVID-19 crisis, he avoided layoffs and put his team onto new projects to generate revenue. The result was Gravity Legal, a new payments system designed for the unique needs of lawyers.

https://twitter.com/DanPriceSeattle/status/1249048273043652608

Look at who is buying and build for them

Just as companies are cutting expenses, others are growing and may need your product or services. Take a look at:

Grocery companies.
Essential goods ecommerce stores.
Manufacturing plants that have refactored in response to COVID-19.
Governments.

If your product is an “almost-fit,” see if you can make the change quickly and begin to sell into that industry.

Cutting costs

If you need to balance the books and revenue won’t cut it, here’s how you can cut costs without cutting employees.

Input office austerity

While perks are likely already cut in the short-term due to not being in an office, you should look to cut non-essential expenses for a longer period of time for even after things begin to go back to normal:

Office snacks / catering.
Plants / office gardens.
Upcoming purchases of office perks like foosball tables.
Office renovations beyond those needed for safety.
Fancy coffee machines.
Conference / non-essential employee travel.
Bonuses.

The last one might be contentious, particularly since not all employees will get bonuses. However, if it’s explained as a temporary thing in order to save jobs (and is done alongside other austerity measures that impact everyone), those that receive bonuses should be ok with not receiving them this once.

Check into payment deferrals

In response to COVID-19, providers of:

Commercial debt (loans).
Real estate (leases and mortgages).
Utilities.
Insurance.
And more.

Are looking into payment breaks to help clients weather the storm. Investigate every large expense your business has to see if it can be reduced, eliminated, or deferred while you work on other strategies.

Think about temporary salary cuts

Dan Price avoided layoffs at Gravity Payments, even after a 50% cut in revenues, because his employees willingly took small salary cuts to save their colleagues’ jobs.

https://twitter.com/DanPriceSeattle/status/1244014634883039232

If you look down this path, be sure to ask employees what they can afford. Asking some people to take a 5% pay cut could be effectively sentencing them to bankruptcy. Others, on the other hand, could take a 25% pay cut and get through the next few months.

Note: Executives / founders should always take the largest pay cuts if you’re going to implement this tactic.

Ask employees for their input on how to save money

As a leader, you may not see every expense going out the door or have access to every cost-saving opportunity. For example, your social media manager may know of a less expensive platform that may not have all the bells and whistles but still allows them to do their job.

In times like these, talk to your employees about the reality of the financial situation. Ask for their input and advice. You may be surprised what they see.

Getting a cash infusion

Sometimes, revenue up and costs down still doesn’t quite balance. In times like those, look for a cash infusion to get you through the rough times.

Debt

Not everyone can afford to take on debt, but many governments around the world (Canada for example) are offering interest free loans for companies impacted by COVID-19. Consider these options as a bridge to get through.

Talk to investors

Most investors are focusing on their portfolio companies right now, since it’s in their best interest to help you succeed through this crisis. Depending on your investor base, they may be able to help you with some bridge financing to get through the rough spots.

Government support

Not only are there loan programs but also grants, bursaries, and more available to different types of companies. Make sure you’re researching all possible sources of government cash.

What doesn’t kill you makes you stronger

There’s a lot going on that’s completely unprecedented. We don’t have all the answers (no one does), but through crises we’ve seen that the companies who fight for their people are stronger in the end. Not only do you retain the minds you already have, but you are in the best position to take advantage of growth opportunities since employees will be far less worried about losing their jobs and more able to focus on the task at hand: survival.