Module Description:
Matt Brown discusses ways you can cut your burn rate quickly, how to think about immediate vs. longer term targets, and three primary expense categories where cuts may make sense.
Full Transcript:
Welcome to our Ubiquity University module on cutting burn rate fast. Today we'll have Matt Brown of the Ubiquity Extended Team, talking us through a few techniques. Ubiquity Ventures is a nerdy and early seed stage VC firm investing in software beyond the screen startups. That means startups that are using smart hardware and machine learning to solve real world physical problems. With that, we'll dive into today's event about cutting burn rate. Matt, thank you for being here today. Can you introduce yourself and then we'll dive right into some techniques?
Yeah, hi, I'm Matt. I've been working with Sunil for the past five or six years on the extended team. Currently I'm at Google, helping the other Bets portfolio grow. Before that, I had a handful of roles at some tech startups, here in the Bay Area, working as controller and VP of finance.
Perfect. Well thank you very much Matt. So let's dive right in. So as we think about a five person, 10 person, 50 person startup, in this particular market, you know the topic of cutting burn rate fast is at the top of a lot of CEO's minds. What is the fastest that you've seen a startup cut burn and what are some informal targets as to how much burn one could cut in a short amount of time?
Yeah, I mean there's some things you can do that are immediate, mainly on the OpEx side. So think about something as simple as providing lunches, to what kind of subscriptions we're paying for, do we need as many seats as we think we need in Salesforce, for example, or NetSuite? And then there's some longer term things that you can think about in terms of headcount and payroll.
Okay, that's helpful to hear that there are a variety of techniques and some can be implemented immediately, some may take a little bit of time. Let's dive right into a couple categories. You know, the first topic of cutting headcount, can you talk to us about how CEOs can think about that, what typical severance terms are? It's obviously not something anybody wants to do, but to save the overall ship it may be necessary. So please tell us a little bit more about that.
Yeah, you have to shift your mindset from kind of this, what do I need to grow, and continue to, what do I need right now and what's necessary? So you kind of have to go through, kind of group by group, within your organization, person by person, and figure out is this someone that I need over the next two months, three months, six months, et cetera? And think about it that way. I think you have to be careful in terms of layoffs around making sure that you are fair across the board. So it may be worth having a quick conversation with, you know, some legal folks around making sure you're thinking about it the right way. Standard severance in young kind of venture-backed companies are anywhere from two to four weeks, probably closer to the two weeks side, in exchange for a separation agreement, which is something very important that you need so you don't have to deal with, you know, potential problem down the road.
Matt, that's really useful, especially those benchmarks and two to four weeks is not a lot of severance, but these are often pre-product market fit, pre-revenue companies, so hard decisions do need to be made. Talk to us a little bit about the mindset of CEOs. You know, at this early stage, folks are fighting the fight to win over employees. They were able to convince some folks from their past or from their close network to join and now they have to do a major mental shift. You know, talk to us about that a little bit.
Yeah, I've seen CEOs struggle with this. It's important to kind of shift your mindset from I want to build a company with some of my close friends or my buddies or people I went to school with or worked with in the past, to thinking more about I'm now the CEO, I need to do what's responsible, I need to be thinking about cash burn rate, run rate, I need to be putting the company first, et cetera. And I know that's a struggle that a lot of first time CEOs have, but it's important for CEOs to kind of shift their thinking there.
Okay. So thank you for the detail on cutting employee headcount, which is almost always the largest expense for a seed stage or series A startup. Let's talk about the other category of other operating expenses. How should we think about that?
Yeah, I would encourage CEOs and folks to go through their entire P and L to figure out where they're spending the dollars. And I know it sounds silly, but literally going line item by line item to understand and asking yourself the same question as to is this something I need and I have to have or is this something that's nice to have? Sometimes there's a gray area, and I think you wanna lean more towards, I don't need this right now, if it's in the gray area, versus like, I need to have this because you can always go back later and add those tools or whatever. I kind of compare it to, you know, you going through your personal budget, we all probably have some subscription services on our credit cards today that we don't necessarily need to keep. And I think that's the same way when you're kind of, same mindset you want to have when you're thinking about cutting costs. There's also within different spend areas, it's not just a yes or no question, it's also do I need to continue to spend this amount? You know, like if you have Salesforce, some of you may be paying for more seats than what you need today. So there could be an opportunity to reduce your monthly cost just by merely reviewing how much you're paying in seats for folks.
Yeah, I think that's an interesting comparison to sort of the personal services that we sign up for on our personal credit card and adopting that same level of vigilance going through those, you know, Salesforce might be $200 a month per seat, and if you have an extra set, or a bulk purchase that made sense when you had different anticipations of growth, it'd be a totally different animal. There's something else you said earlier, Matt, that I thought was really interesting, when we were talking about headcount, and I think it also applies on these other operating expenses. What you said was think about the next month or two months or four months if you really need that person or if you really need this operating expense item. I think that's interesting for many CEOs who've spent a lot of time building the right team or building the right set of tools and vendors and services, they may be reluctant to let go of things, but it really is interesting to think about this in a relatively short time period that you need to make it through the next three or six months and you could bring those resources back in certain cases. So that notion of keeping a really sharp knife as you're thinking about cutting, to cut burn, I think is important, extremely important in seed state startups 'cause there's not that many places to cut.
Yeah, you definitely have to shift your mindset to survival mode and things move so fast in the startup world that three months is, you know, is a long stretch of time and things can change during that period of time and you'll have to reevaluate it in three months and figure out what's best for the company at that point in time.
Yeah, I often like to think about, you know, months in startup life are like years in normal life. So if it's a few months, I think that can be an interesting timeframe to make decisions. It may also be worthwhile enumerating what changes are reversible, right, as we think about cutting burn. Things like subscriptions or even pausing your Salesforce subscription or pausing, you know, your extra server provisioning or things like that can unlock some cash. So that's helpful so far. I think the last topic are to think about other areas to unlock cash, specifically with vendors, with inventory. Can you say a word about that?
Yeah, I mean I think there's opportunity to always bring in AR. You can get creative with some of your customers around, hey, if you pay early we'll offer a discount, et cetera, if that makes sense to the business. And also the reverse is true as well on the AP side. I mean reach out to your vendors, let them know what's going on, that you want to continue to have a strong partnership, but if there's flexibility around, you know, payment terms, can we move that 30 days to 45 days? Can we move those 45 days to 60 days? Every little bit helps and it adds up over, you know, over time. So it's just a different way of kind of thinking about it.
Yeah, so for the less business audience members here, so accounts receivable, AR, this is money that people owe you, as your company, and then accounts payable, this is money you owe other people, vendors, et cetera. So you mentioned figuring out a way to pay a little bit slower and that can be just because you ask and many people don't ask, or it could be because you, on the inbound side, if somebody pays you sooner, but a little bit less, so if you're owed $1,000, if they pay you $900 sooner, that also helps. And I think there's an imputed interest rate and all that, but the short answer is anything to get cash in the door sooner and cash out the door slower is interesting. Across the Ubiquity portfolio, we've seen many of our companies be on the receiving side of this, where their underlying customers want to pay a little bit slower and we usually are able to work out something 'cause everyone's going through these hard times together.
Yep, exactly. Definitely.
Okay, perfect. Well Matt, this is really useful, a quick tour of three techniques to cut burn fast, whether it's around headcount, operating expenses, or those balance sheet items of accounts receivable, accounts payable. I know that you're available to the Ubiquity CEOs for further follow up, but thank you again for this Ubiquity University session on cutting burn rate fast.
Absolutely, happy to help.