Startups are typically at the mercy of venture capitalist funding, but as of the first quarter of 2016, VCs are pulling back on how quickly they hand over that much-needed funding. According to a report from Dow Jones VentureSource, funding for U.S. startups fell 25 percent from the previous quarter -- marking the largest quarterly decline since the dot-com bust in 2000.
It's bad news for startups. As these small companies feel the pressure, they're forced to budget cuts, layoffs and buy-outs as a way to stay afloat amid limited funding. Startups will need to get strategic, says Al Stevenson, a principal with WinterWyman Executive Search's Technology practice.
And it's not just small startups that are experiencing cuts -- startups that have seen major growth, like Dropbox, are cutting corners and creating a mentality of company-wide "thoughtful spending," according to Business Insider. Businesses all across Silicon Valley are looking at ways to remain profitable, while providing reasonable perks for employees.
"Companies need to find aggressive ways to cut costs and extend their runway. That includes layoffs, consolidation of products and services, shuttering operations, buy-outs, mergers, and going to debt financing or other less desirable forms of financing," says Stevenson.
Be prepared for staff reductions
No one wants layoffs, but for struggling startups, it's an unfortunate reality. Stevenson says businesses should expect to be prepared for staff cuts and layoffs -- even if it's just a "last resort" plan. Startups all across California are laying off employees. Business Insider reports that layoffs have more than doubled in the Bay Area in the past year. Companies like TiVo, Yahoo, Intuit, Twitter and HP are just a few of the tech companies that reported layoffs in the last fiscal year.
Stevenson points to a trend where startups are taking on a "mean and lean" approach and making drastic cuts to minimize company spending. And, unfortunately, staff is one area that often takes one of the biggest hits.
"To start, companies should identify their business objectives and then determine how to adjust their hiring process and current workforce. From there, companies may need to look at layoffs, combining roles and other restructuring efforts," he says.
As with any new business plan, you'll want to head into restructuring with a firm plan in place, and remain open with your employees. It's also a way to quickly gauge which employees are in it for the long haul, and which ones will look for a way out of the company.
Adjust your salary strategy
Employees are expensive -- between the cost of salary, onboarding and benefits, it can be difficult to strike that balance between coming up with a competitive offer and not hurting your company's bottom line. As a result, you might consider implementing a company-wide salary cap -- one that extends all the way up to the C-Suite, says Stevenson. He says initiatives like a salary cap can help show your employees that the executives, founders and board are all in it for the long haul -- and aren't just looking to get rich quick and ditch the company.
"[The policy] needs to be championed by the founders, investors, leaders -- and they need to sell the strategy to the company at large," says Stevenson. "As a founder, you need to lead on this effort, for example, you can take a smaller salary than the ceiling -- reverse the structure -- and pay your employees more than you pay yourself. Startup founders can take a page out of what they see public CEOs do in tougher financial times."
Another approach is to encourage a pay-transparency policy in your company, says Stevenson. Data from PayScale suggests that when employees know the salary of their peers -- and even bosses -- they are actually less likely to quit. In fact, the results found that even just conducting more open conversations about compensation helped employees feel more satisfied with their jobs. Opening up the lines of communication and creating a better sense of autonomy around compensation might help ease the blow of, what Stevenson calls, a "salary freeze."
Be transparent in hiring
A new employee is an investment, so the last thing you want to do is hire someone who doesn't know where your company stands -- and there's only one way to do that: Be as transparent as possible from the first interview. The last thing you want is to hire someone without giving them the full picture, and then quickly realize they weren't the right culture fit, says Stevenson. Chances are, you'll lose money on the new-hire, because you'll be looking to replace them sooner, rather than later. You want to give candidates a clear picture of the company's struggles, successes and long-term strategy.
If a candidate fully understands the company's current position and state of funding and salaries, there won't be any surprises. "It is more efficient for leaders to put it 'all out there' at the beginning of the hiring process. If you wait to the end of the interview process to tell them about this company structure, they will be more apt to turn down your offer -- and you have wasted their time and yours," says Stevenson.
And be transparent with your internal employees as well -- don't let them feel you are hiding anything about the business from them. Stevenson suggests when enacting new policies -- like a salary cap -- that you formally announce each initiative and acknowledge the disadvantages, as well as the advantages.
The best thing you can do in the current funding climate is to temper your expectations and redefine how you perceive growth, says Stevenson. If your business is focused on growing the business through hiring -- it might be time to take a step back and reconsider how you value growth.
"Many executives hold a new viewpoint and are not equating growth with how many people they have hired; it is currently a broken metric in this market. Savvy companies should focus on a fresh benchmark for growth -- business objectives, user acquisition and retention," says Stevenson.
And don't hide these new growth expectations from your employees, he says. It goes back to remaining transparent, he says, companies often make the mistake of waiting to tell employees about vital business changes, and it's usually too little too late. Instead, keep them informed throughout the process -- that way, you'll be left with employees who remained by choice, and are therefore prepared for the realities your company will face.
"A company may have to downsize, adjust goals -- and the leaders and the employees will need to be willing to compromise. As a leader, you need to be front and center -- hold daily stand-ups, quarterly meetings -- and be leading the charge with this new information and change of direction," he says.
This story, "Lack of VC funding forces startups to think lean" was originally published by CIO.