Cost Optimisation for Startups

Today, venture capitalists are more cautious about investing in startups resulting either lower valuation or no investment at all. It’s a sensitive stage, particularly for startups whose business model is built on growth by fundraising rather than bootstrapping.

We encourage startups to take a deep breath, not to panic and evaluate how to generate more value for each penny spent. We strongly believe that those who rightly manage their costs, do right investments and find right approaches to monetise their business will grow even stronger once we’ve made it through these tough times.

This article focuses on recommendations for pre-seed to early-stage startups. Read our tips, and feel free to book a free introduction call with us at the end of our article.

Before We Start: Understanding Cost Optimisation

According to Gartner “Cost optimisation is a business-focussed, continuous discipline to drive spending and cost reduction, while maximising business value.” This approach encourages all businesses to take a proactive and strategic approach while cutting their costs to fund growth. This way, value is maximised.

Always keep in mind that reactively cutting costs without analysing the future consequences will create more hardships than benefits. Cheap is sometimes more expensive. Businesses always should seek to maximise the value they generate while spending.

Manage Cost While Initiating Your Startup

Validate your idea:

You might have a great idea, and you might know it could change a group of people’s lives, or maybe even change the world. But you need to make sure that your idea is valid before spending thousands of pounds building your product.

Here is a good way to start. Ask the following questions:

• What is the problem?

• Who are my customers / what is my target segment?

• How important is this problem for my potential customers?

• How does my idea address this problem?

After replying honestly to these questions, if you believe the idea might work, then start testing it. Do not build a product yet. Not even a minimum viable product! Initially, you should be validating your idea with market research. A few examples: collecting emails via landing pages, surveys on social media on your target market, face-to-face surveys, etc. In this way, you might find you can validate your idea, you might need to mature your idea or you might think about pivoting now that you’ve tested the market demand.

Build your Minimum Viable Product (MVP):

You’ve done your research and, in theory, you’ve validated your idea. But is it truly valid? Let’s test in the real world. The quickest and most cost-effective way to get real world customer feedback is by creating an MVP. While creating an MVP you build the simplest version of your product idea consisting of the core features only. And it should be a working product!

What do we mean by that? Say you need a vehicle to transport you from A to B. In order to achieve that, initially you do not create a sophisticated car wheel, but you build skateboard because that skateboard will help you to travel from A to B in a simple form. Then through the build-measure-learn cycle, iteratively you test your product to decide how to improve. Eventually, you end up deciding to build that car or maybe you’ll pivot to a fancy motorbike.

While building the MVP, be sure to keep it simple. Don’t overengineer, don’t over automate and never isolate yourself or the product from the market. You do not build your MVP as your ultimate perfect product, you build your working prototype to test real customer feedback, manage your costs and use the product as a showcase to attract the potential investors.

Manage Your Operational Expenses

Decide Your IT Sourcing Strategy

It is the largest challenge of a startup to decide IT sourcing as most startups rely on technology to scale. Although not all startups sell technology solutions (aka the core product is not technology), most of them still need use technology as their core enabler to initiate and run the business.

Finding a CTO as cofounder:

Most startups prefer to find a CTO as a cofounder in exchange for equity. A good CTO will probably get 20-50% equity. A CTO will be not only the tech person, but also your person to walk you through this journey. The CTO is the person that will help you to build the technology end-to-end. The CTO needs to have variety of different tech skills and a business mindset. Finding the right CTO is hard, as IT sources are scarce and the best people are likely to already have amazing opportunities in the market. So, the CTO will need to really believe in the idea in order to stay.

Working with a freelancer or agency:

If you do not want to distribute equities on day one, you might consider spending around 5-20K to build your first MVP. In this case you might think about working with a freelancer or an agency.

A freelancer may cost less, but reliance on a single person can create a single point of failure. We mostly to recommend hiring freelancers for developing non-core products or when managed by a CTO.

On the other hand, the right-fit agency can help you deliver good quality work and continues to maintain and improve the product after building the first MVP. Unlike when working with a freelancer, mostly you do not rely on a single person, but a team that can support your business 24/7. As a plus, in an agency you’ll have access to a broad range of knowledge resulting in a higher-quality and more secure product. Working with an agency costs only a little extra compared to working with a freelancer, but these services will provide a significant boost to the growth of your startup and decrease your future technology costs.

Boost the Efficiency with Off-the-Shelf Tools

As a startup, you will need to use off-the-shelf tools to boost efficiency. In some cases, you can even start running your business with these products in the initial stages rather than doing custom software development.

Here are few products to boost efficiency at low/no cost with a great value:

• Works management: Trello, Asana, Jira

• Social media management: Buffer (Posting), EmbedSocial (link in bio)

• Accounting solutions: QuickFile

• Design: Canva, Figma

• Company Landing page: Squarespace, Wix, WordPress

• E-commerce website: Shopify, Wix

• Online Payment: Stripe, Wise, GoCardless

• Workspace: Google Workspace + Slack, Microsoft Teams

• Webinar hosting: Zoom

• Calendar booking: Calendly

• CRM: Hubspot

Our recommendations are not limited to these. Book a call with us to learn what fits to your business.

Manage Your Investments

Invest to Generate Value

Having a startup is not an art, it is a continuous iterative cycle of build, measure and learn. Every investment decision, e.g., building a new feature, requires you to calculate the return of that investment. Always challenge the investment on the value it generates. How does this investment help the business?

• Will it help me to sell more?

• Will it increase customer engagement?

• Will it boost efficiency and profit?

If you cannot support the investment idea with solid value, it is time to rethink. It’s possible that killing the idea will enable you to invest in more value-generating ideas.

Invest to Monetise

You need to invest in research and marketing to find out the right way to monetise the product you are building. The very first rule: you need to sell!

When the market is optimistic, it makes sense to sell even if you lose money. At the initial stage, building that customer base and dominating the market are crucial.  Investors are looking for a solid customer base before investing. So, for pre-seed to early-stage startups whose goal is to fundraise, prioritise building a customer base. You can focus on profit later.

However, in a pessimistic environment, you will have more difficulty finding investors. In that case, you need to invest more in finding the right strategy to monetise your product to keep a steady cash flow. Selling, renting, subscription, commissions, ads, whatever works for you, you need to figure out. Of course, you should define ways of monetising in each environment because the market’s spending habits vary depending on each situation. In order to find out, you will need to spend more on marketing and do A/B testing which is a comparison method of evaluating two variants to observe the most effective outcome.

Right Timing on Investments

Most clients come to us ready to invest in a complex software product with complex integration requests designed for large enterprises’ systems. In most cases, these products will have higher costs. We guide our customers with smart advice to reduce development costs. Here’s how!

We never say don’t, but we try to keep things simple during the initial stages. This way, the client can use cash-in-hand in a more effective way in the early stages of the business. In such situations we always try to help our clients to go back to the initial problem that they are trying to solve. If you are trying to sell a shirt, you need a simple ecommerce website. Even you want to build a platform that includes multiple suppliers, you will start with something basic. So, the idea is: first focus on selling that first shirt. After you sell 50 or 100 or 1000, then it is time to start automating as by now you will know your business is valid and that you need to scale.

A Few Last Things

We hope these recommendations will help to you initially to boost your startup. In whatever stage your startup is, we are ready to help with your questions and for your service requests:

• How should I validate my idea?

• How will I build my MVP? I need an extra hand to build this.

• How should I decide my IT sourcing? How will I make sure that my cofounder CTO is the right one for this job?

• How will I choose the most efficient tools for my business?

• How will I decrease my costs without breaking things?

• And many more…

Book a call with us to build a robust, scalable startup. We are happy to support you and be your IT partner on any stage in your startup journey. You are never alone.