Cost Cutting Strategy for Startups
You're burning cash faster than you forecast. But cutting costs is a delicate game—cut too little and you run out of runway, cut too much and you destroy what's working. Here's the framework.
You raised 24 months of runway. You're 8 months in and you've burned 40% of your cash. At this rate, you'll run out in 12 months. Your Series B isn't happening until month 18 at the earliest.
You need to cut costs. But how much? Where? And how do you do it without tanking morale, losing key people, or killing the features that are actually working? This is the founder's version of triage.
The Core Principle
Cut costs to extend runway, not to look good on a spreadsheet. Every dollar saved is another week you stay alive. But some costs drive revenue—those cuts might kill your company faster than burning does.
When You Need to Cut (and When You Don't)
Not every cash crisis requires cost cuts. Sometimes the answer is to raise more money or accelerate revenue. Know the difference:
You SHOULD Cut If:
- Your runway has dropped below 12 months and you can't confidently raise in that window
- Investors are telling you Series B is 18+ months away
- Your burn rate is accelerating (monthly burn growing MoM)
- You've hit a product-market fit floor but growth plateaued
- Your unit economics are negative and not improving
You Should NOT Cut If:
- Runway is still 18+ months and you're growing (even if efficiency is poor)
- Series B is clearly on the horizon (offers in hand or advanced diligence)
- You're spending heavily to accelerate growth, and growth is working
- Costs are driving revenue (sales team closing deals, marketing generating leads)
Timing Matters
If you wait until you have 6 months of runway left, you're in crisis mode. Cuts made in panic are usually wrong. Make tough decisions when you have room to recover from mistakes.
The 30-Day Cost Reduction Playbook
Here's a systematic approach to cutting costs without destroying value. Implement in phases:
Week 1: Audit Everything
Line-by-line expense review. Categories:
- Payroll: Usually 50-70% of burn
- SaaS/Services: Redundant tools, unused licenses, overpaying for features you don't use
- Infrastructure: AWS costs, hosting, third-party services
- Sales/Marketing: Ads, events, consultants
- Office/Other: Rent, travel, meals
Days 3-7: Identify Quick Wins
No disruption, immediate savings:
- Cancel unused SaaS (typical startup has 20-30 unused tools)
- Renegotiate contracts (AWS, insurance, vendors)
- Freeze hiring immediately
- Cut discretionary spending (events, meals, travel)
- Review contractor spend (end projects that aren't critical)
Typical savings: 10-20% of monthly burn, implemented in <2 weeks
Days 8-15: Assess Unit Economics
Which product lines, customers, or channels are profitable? Which burn cash? This tells you which teams you can shrink without killing revenue.
Example: Your sales team is closing deals with 3x LTV:CAC. Your marketing is generating leads at a loss. Cut marketing spend, not sales.
Days 16-25: Plan Headcount Changes
Payroll is the biggest lever. If you need to cut 30-40%, you need layoffs. Do this carefully:
- Evaluate person-by-person: high performers vs. not contributing
- Consider: who does critical work? Who would be hard to replace?
- Plan severance (ethical minimum: 2-4 weeks, ideally 1 month)
- Prepare communication for staying team (why this is happening, where company goes next)
Days 26-30: Execute & Communicate
Do all people conversations in one day (avoid death by a thousand cuts). Then communicate:
- Why: Be honest about business situation
- What we're cutting: Give examples (helps everyone understand the reasoning)
- What comes next: Roadmap, product focus, how to win
- How team is valued: This doesn't mean we don't believe in you, just business reality
How to Handle Layoffs Without Destroying Morale
Layoffs suck. But sometimes they're necessary. Do them right:
Be Clear on Criteria
Don't let people guess why they were let go. Was it performance? Role elimination? They deserve to know.
Offer Fair Severance
At minimum 2-4 weeks, ideally 1 month. This buys you credibility with the team that stayed.
Help with Transition
References, connections, recommending them to other startups. Don't just cut them loose.
Protect Remaining Team
Be explicit: no more cuts planned. Give visibility to runway and plan. People will stay if they trust the math.
Typical retention hit after layoffs: 5-15% of remaining staff will leave (usually the best people with options). You can minimize this by being transparent and treating people well.
Pro Tip: Over-Communicate
After layoffs, uncertainty kills morale more than the cuts themselves. Weekly all-hands meetings. Monthly board updates shared with team. Transparency about progress. Show people the path forward.
What NOT to Cut (Even When Money is Tight)
Some costs are actually revenue drivers. Cutting them saves money today but costs you 10x more in lost revenue:
Don't Cut: Proven Sales/Marketing
If your sales team is closing deals with 3x LTV:CAC or your marketing is generating customers at positive unit economics, don't cut here. Cuts = lost revenue immediately.
Don't Cut: Product Development (Too Much)
You can trim non-essential features, but if you stop building, customers leave. Reduce scope, don't eliminate engineering.
Don't Cut: Critical Infrastructure
Security, compliance, operations—outages or breaches cost more than you save. Keep these at minimum standards.
Don't Cut: Your Best People
It's tempting to cut top earners. Don't. Losing your best people to save money is like removing an engine to reduce weight.
Cost Cutting Mistakes
1. Cutting Random 20% Across the Board
Spreadsheet thinking. Some departments drive revenue, others don't. Cut 50% from non-revenue areas and 0% from revenue-driving teams.
2. Not Communicating the Why
Surprise layoffs destroy trust. Tell people the business situation before cuts happen. Most will understand necessity.
3. Cutting So Much You Can't Execute
You saved 6 months of runway but your team is now 5 people trying to build and sell. You'll fail anyway. Cut to extend runway, not to achieve zero burn.
4. Not Re-Evaluating Unit Economics After Cuts
You cut your sales team to save money. Now customers are churning and revenue is dropping faster than costs. You made the burn worse.
5. Treating Cost Cuts as One-Time Event
You cut once. 3 months later you need to cut again. Better to have a philosophy: How will we run profitably long-term? Then re-design.
How Much Should You Cut?
You need a target. Here's what we recommend by stage:
Seed Stage
Target runway: 18-24 months. You need time to find product-market fit. Can't do that in 6 months.
Series A
Target runway: 24-30 months. Series B is harder. Need cushion for execution and raising.
Series B+
Target runway: 24-36 months. At this stage, you should be managing to specific unit economics, not just runway.
Minimum Threshold
Never let runway drop below 12 months. Below 12 months, you're in permanent crisis mode and can't think strategically.
Need Help Planning Cost Cuts?
Eagle Rock CFO helps founders think through cost reduction strategically. We'll model scenarios, identify quick wins, and help communicate the plan to your team.
Get Cost Reduction Plan