How can I reduce burn while keeping up momentum?

Funding markets are not what they used to be, and many midstage SAAS startup founders are suddenly being asked to reduce burn while delivering similar momentum.

It seems like an impossible ask. And yet we find that the average Series A SAAS startup has ample scope to increase efficiency, it just hasn’t practiced that perspective or that muscle very much. Here are ten tips that can help reduce burn while keeping up or even increasing growth momentum.

Identify the core to focus on: who, what, whom and where

The first tip is perhaps not a direct money saver, but it is the prerequisite for many of the other tips. What is the absolute core of your SAAS business that you should focus on, even protect, at all cost?

Don’t just describe a broad TAM vision or who you will serve when you make $100M in ARR. The absolute core is the intersection of a key variables where you have found your repeatable success:

Who represents the first ideal customer profile?
What is the core product you sell them?
Where have you made your first sales?

For example, if you looked back at Uber in their starting days, their “who” would be twenty-somethings who want to impress someone, their “what” was black car rides and “where” was San Francisco, California.

The point of defining the core is that most momentum at low cost is for the taking in penetrating your core market further, and more momentum at modest cost is available in adjacent markets where only one variable is different (eg same customer segment and product but different geography). High cost start occurring when you change two or even three variables.

Defer unproven projects, non-core segments, products, geos

Now that you have defined your core, be ruthless about going through your list of open projects, new products, new channels, new partnerships etc. Which ones of these are still unproven? And which ones of these are not even targeting the core or a core adjacency? Those should be the first projects to defer, defund or even scrap altogether.

If you already have multiple products, multiple geographies, multiple customer segments or multiple channels, then do yourself a favor and ask your finance people to draw you waterfall chart based on relative profitability (not revenues).

Invariably, midstage SAAS startups find that some of their core markets are highly profitable, but that added products, geographies and/or customer segment are sucking up much more spending than they earn in revenues. Looking at these waterfall charts makes it easier to decide where to step on the brakes, at least until the funding climate starts improving again.

Intensify repeatable marketing

Reducing burn is not all about cutting cost. It is also about generating more revenue out of the resources you currently have. Often this means optimizing your marketing. In a B2B context, after all, marketing is just a way to make your sales people more efficient.

Step 1 is to focus resources on the repeatable marketing tactics that have already proven to work, and step 2 is to righten the balance between how much you spend on sales people versus how much you spend on marketing.

In many Series A SAAS startups, we see marketing still in experimental mode, trying to fund many channels at once without a clear “bread and butter” tactic generating reliable repeatable lead flow. Generally the solution is to be disciplined about finding the pockets of excellence that do seem to work, then to be ruthless about scaling those while cutting investments in all the other potential channels. Best practice is to have just one test running against base all the time, and to focus other resources on optimizing the lead flow in the base per se.

Streamline your target list

For both B2B sales and marketing resources, a key driver in getting more bang for the buck is to ensure you have a clearly focused target list. Too many SAAS startups at the Series A and even Series B stage use a “spray and pray” approach where marketing resources go wasted, sales people have to deal with uninterested leads and product gets hundreds of requests for features that really do not serve the core target group.

Where we invariably see huge momentum at lower cost, however, is when the SAAS startup starts honing in on its list of core target customers. Translating an abstract ideal customer profile into “here are the 250 companies and decision makers that we should talk to” makes a huge difference in focus, collaboration and sense of achievement. Let alone that people in similar companies often talk to each other, so that you can leverage word-of-mouth marketing as an additional cost reducer while achieving deeper penetration.

We often preach that clarity is efficiency, and there is no area in Series A SAAS startups where this matters more than in simply assigning responsibilities to each department.

Invariably companies organize by area of expertise, and then start piling on assignments that seem like good ideas for that area of expertise to be thinking about. Before you know it, executives are being judged not by their output but by how fast and compliant they are when the founder sends them yet another idea. Until the next idea arrives, that is, with the previous idea going into the drawer before the company ever even had a chance to execute something.

The alternative is to do what Peter Thiel did at Paypal in the early 2000s: be abundantly clear about the one metric each department is responsible for delivering productively. One metric, yes, just one. At least for a given year or quarter. This forces you to make the difficult choices at the highest level. Do we hold sales more accountable for delivering revenues or for delivering logos? Do we hold marketing accountable for pretty pictures and campaigns, or for leads accepted by sales? Is engineering’s first responsibility ensuring uptime or ensuring feature delivery? Is HR held accountable primarily for people recruited or people retained?

This is what we call the “widget” per department, the (non-monetary) measure of unit output that they are delivering time and time again. Every single executive will try to argue that they have way more responsibilities than that one metric, and that is fine. But as the leadership team in general, you can say there is one metric that matters most to us. And all the other metrics you can measure internally.

Clarifying and focusing on the widgets is a huge driver for more momentum at lower burn, because now all the other activities can be deprioritized or done at minimum cost.

Calibrate hiring by widgets-per-employee

Once you have widgets clarified, it is time to start calculating departments’ output in terms of widgets-per-employee, and calibrating it to their hiring budget.

Suppose we have agreed that engineering’s first and foremost output widget is “tickets resolved”. Then we look back a few quarters and see that engineering used to resolve 10 tickets/month/engineer, whereas now it is down to 8 tickets/month/engineer. That would indicate that there are internal inefficiencies that need to be resolved before more engineers can be hired. In extreme cases, it may even indicate the need for a layoff.

On the other hand, suppose we have agreed that customer success’ first and foremost output is “renewing customers”. We look back a few quarters and see that they use to have 13 renewing customers per customer success employee and now they have 20. That probably means we should grant a hiring request for customer success right away. That will make the ratio go down immediately, and then they will take the time to bring the ratio back up before they get another hire approved.

Track and increase “first time right”

Once you have departmental widgets clarified, you often find the problems start concentrating around the “handovers” between different departments. Classical examples are “what leads that marketing generates are acceptable to sales”, “when sales signs a customer, what do they deliver to customer success” and “when product launches a feature, what materials are being produced to educate external customers and internal support staff”?

The trick to reach more momentum at lower cost is to look at these challenges as an end-to-end process, at what we call an entire “value stream”. Mapping out the handovers between departments starts to clarify how many issues, requests and even customers can “fall through the cracks” and how often people down the chain need to clarify, correct or complete previously entered information before the customer can be served correctly.

It is not unheard of, in a Series A startup, to see more than half the operational capacity remain busy with all these clarifications, corrections and completions. This not only causes many errors and customer complaints, it also adds huge cost to your operations and a big burden to your SAAS margins that influence your rule of 40.

The solution? After mapping out your value stream, focus frontline teams on improving how many issues flow through “first time right”. This will set off clarifications of expectations, complete data entry at the start and a sense of pride in frontline workers how much better they are serving the customer. And as a side benefit, everyone starts feeling more productive and empowered.

Set team size standards of 7-8 employees per manager

Assuming you can avoid a larger layoff, another big cost lever to pull is to look critically at team sizes. Almost all fast-growing Series A startups we see have built more teams by promoting junior workers to managers, often giving them just one or two employees to manage “so they can learn”. This is OK as a temporary measure, but it can be costly and bureaucratic if the organization starts getting used to “normal” team sizes of just 2-3 people.

Team sizes of just 2-3 people set managers up for micromanaging and watching over everyone’s shoulders. It also makes it much harder to coordinate across managers when all the micro teams have to be involved. Finally, come performance review time, managers just don’t have enough comparison material to be able to evaluate some people more negatively than others.

Our advice is to start setting standards for the median team size around 7-8 people per manager. This seems to be the ideal size where managers have too little time to micro manage everybody, and can focus on the broader picture of team performance and coordinating change with other managers.

Reward A players with more responsibilities and, yes, bonuses

While just setting team size standards does not reduce cost in the short term, combining two micro teams under one well-performing manager does. This is an excellent opportunity to reward some true A players in your organization, while signaling to less effective managers it is time to move on or to go back to an individual contributor’s role.

Most Series A SAAS startups have never done a true analysis of the A players in the company, let alone discussed that analysis and created consensus about it in the leadership team. But once you have gone through that exercise, it is always surprising how much clarity it generates in terms of what a true A-player looks like, why most “good people” in the company are still far from being true A-players, and how important it is to reward the 10-15% A-players with more responsibilities and, yes, good bonuses.

Bonuses must be tight while momentum is still trailing, of course. But our advice is that the limited bonus pot available should be concentrated on true A-players, while the business takes a calculated risk with some of their B-players and more mediocre team members leaving.

Free up Bad Fits’ Future

We think almost all Series A startups can save substantial cost with the above nine tips without the cost, demotivation and loss of momentum of doing a full layoff. In more extreme cases, of course, layoffs are necessary. But they also destroy trust and momentum so it is better to execute other efficiency measures if you still have room.

However, even if not doing a layoff, the startup should still let go of some people. The focus here should be on those individuals that have turned out to be a bad fit, because of their performance, because of their behavior, or sometimes just because of a role they were hired for that the business no longer needs.

Holding on to these bad fits not only sucks energy and motivation from the entire organization. It also is unfair to the people themselves if nobody trusts them to perform, if their values are not aligned to those of the broader team or, worse, if they are in a role that the organization no longer values. Better to let go of these folks, provide them with personal support in finding a new role somewhere else, and keep the rest of the organization moving along with fewer distractions.

A full A-player analysis, based on executives’ anonymous opinions and discussed in full in an executive offsite, will provide absolute clarity on who are the worst fits that should be let go. There is no reason to keep these people on board any longer. Free up their future.