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Some tips on cost reduction October 26, 2008

Posted by jeremyliew in cost reduction, startups.
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PE Hub has an interview with one of the cofounders of Sherwood partners, a company that has helped close or restructure almost 200 startups. It includes some specific advice for startups looking to extend their runway.

On cutting once, or cutting multiple times:

Once you know who is getting axed, what’s the best way to do it?

If you do cut, you only try to cut one time. You cut deep and sharp because you have to build morale up and everyone left has to be comfortable that they have a job.


Meaning you have to make all of your cuts at once? Can’t it be an iterative process?

I’ve been doing this for 30 years and if you do it strong and deep one time, everyone complains for a period of time, then gets over it. Also, I’ll be honest with you, I’ve terminated people and two weeks later, I’ve brought them back and apologized for cutting too deep. Usually, they come back. It’s acceptable to be human as long as you’re not a jerk.

On non-labor cost reduction:

Are there other, less painful, ways that can startups can reduce costs right now?

You can cut the food that you’re giving employees. You can ask people to take a small reduction in their salary — or a large cut if necessary. You can stop giving away free services. The beta customers that are costing you 12 percent of your employee base — it’s time to ship up or shape out and you cut ‘em.

Look at your electric bill. Are you running your utilities at night? Stop. You can negotiate with your phone service provider. We do it all the time, negotiate debt on unsecured creditors. It’s either: get nothing, or get something. People don’t want to litigate and sue. I go to companies and sometimes we get savings of 50, 60 cents on the dollar for a going concern.


What about real estate? Should people be looking for cheaper rents?

Look, there’s plenty of real estate right now. Even Palo Alto is starting to have vacancies. It’s not about where you look. If you’re honest with your landlord, they might go ahead and give you a discount for a year and tag [on the savings] to the end of your lease. Or they might say, “Okay, look, I’ll give you a longer lease for less money per month and we’ll blend the rate.”

Now, can you do this when a market is hot? Absolutely not. But right now, do you think everyone isn’t a deer in the headlights? No one anticipated this tsunami. Anyone who says they saw this coming is a liar.

There is lots more at peHub.

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