• Rich Zhou

Should startups lay off employees due to COVID-19?

Updated: Jun 9, 2020

Many clients have asked me over the past few weeks. There is no definitive answer, but startups should be aware of a few key points when contemplating laying off their team amid this crisis.

Cash Runway

How long till your cash runs out? Take your cash balance and divide it by the monthly burn rate. Subtract 6 months from that number because that's how long it normally takes to close a round. In this pandemic, you will have less than that. The most obvious reason is the lack of revenue. The main reason, however, is that VCs are busy using their capital to keep their portfolio companies afloat. Providing new series of capital will be at the bottom of their priority list.

Percentage of Monthly Burn Rate for Partnerships

Next, let's talk about the Monthly Burn Rate (MBR). Depending on location and stage of the startup, the MBR can be anywhere between $10,000 and $15,000 per employee. That means a seed company of 10 people burns on average $125,000 per month while a post Series A startup (20 - 50 employees) could burn between $200K to $1M per month. Then, you need to figure out the percentage of salaries in departments related to "potential partnerships". While partnerships are great for bulk user acquisition and revenue boost, any form of conversation will most likely be halted during this lock down. With no end in sight, it may be prudent to reduce costs in these areas.

Frequency, Velocity and Form of Communication

For startups that depend on large corporate partners to develop new features or marketing initiatives, if you thought it took a long time to structure a contract, wait till you see how much longer it will take in this environment. Part of the problem is the dull choice of communication: emails. Emails are often ignored and put aside for weeks, months and even quarters. Before you know it, you've spent millions on headcount that only follows up on emails and creating to-do lists in Google Docs. These are one of the most expensive roles in the organization. Significant capital can be saved by restructuring this area.

You can also increase the assertiveness of your communication. Don't rely on emails being bounced back and forth but instead try other means of communication with higher forms of frequency like phone calls, conferences and instant messaging. Cryptocurrency is the one industry I can attest to with new-age high frequency medium–the majority of communication is done on Whatsapp and Telegram. Tell your clients you are serious to do a deal and that you appreciate their business in this time of crisis.

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