Management

How Startups Can Manage the Operational Costs of Technology

A carefully considered approach to scaling keeps operational costs in check.

Teague Goddard is a startup strategist at CDW.

Nick O'Shea is a high growth startup manager at CDW. He is responsible for developing strategies and programs to help CDW sellers and partners grow meaningful relationships with startups nationwide.

As a startup scales, it can become increasingly challenging to square early cost estimates with how the business evolves. Funding can be fickle, and many startups find themselves having to narrow scope, pivot to a new business idea or shut down entirely. As CB Insights notes, the top reason that many startups shut down is because they run out of money.

As they look to limit cash burn, many organizations will find ways to limit the amount they spend on assets that can quickly depreciate in value. This need for flexibility is a main reason many have looked to solutions driven by the cloud or Software as a Service business models.

There’s room for a similar mindset when it comes to other technology investments too, and working with a trusted partner can help get you there.

Why Startups May Want to Establish Alternative Lines of Credit

One of the reasons many young companies may struggle with costs is a lack of access to credit, which can make it challenging to float expenses for key technology investments that they need to move forward.

Many traditional banks or vendors may be less willing to offer startups financial support, in part because of how young these companies are. If there’s no credit history, the case for receiving a loan or a line of credit becomes harder.

But there are contextual advantages that can help a startup overcome the amount of money in their accounts. For example, let’s say that your startup has support from a major Silicon Valley venture capital firm. That’s a clear sign of confidence in your company and early proof that it might be on the cusp of something big, but not necessarily something that might show up on a credit report.

In CDW’s case, we have invested in funding and investment data that can help highlight leading indicators of success that account for signs of investor confidence when offering support to businesses. Additionally, by offering purchases on a net-30 basis, where an organization has 30 days to pay the full amount, it offers a valuable service to startups that are looking for ways to highlight their viability.

It’s not just about looking at a startup’s burn rate but its viability, too.

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When Starting Off, Be Sure to Maintain a Healthy Runway

Startups should always have a close eye on their expenses, revenue and cash on hand, particularly as they are trying to find product/market fit. This is also known as determining a company’s "cash runway." Examining this accurately (while factoring in extra cash for unexpected challenges) is critical to getting the plane off the ground.

CDW understands these dynamics and is well positioned to offer multiple options to not only curb upfront costs but spread them out over time. How do we do this? CDW partners with over 2,500 technology brands (software and hardware) which allows our vendor-neutral solution architects to offer a range of choices that focus on price and performance rather than simply the best in breed. This right-sized approach allows startups to receive technology solutions tailored to their specific needs. Additionally, CDW is a full-stack reseller that can facilitate tech needs from operations and facilities to production-side technologies. This model encourages a long-term relationship focused on savings rather than one-time high margin sales. Finally, all CDW startup customers have access to a dedicated team of resources to assist in their tech journeys. This starts with the CDW account manager, who acts as an extension of the team. Having a dedicated CDW account manager also aids with business systems and Software as a Service (SaaS) product analysis to provide evaluations on feature overlap of tools and SaaS license pricing structures. Many of our customers find this to be a necessity today given that most SaaS tools are designed for oversubscription.

It's widely agreed that startups should plan to have at least 12 to 18 months of runway and focus on cultivating positive cash flow. This not only boosts the company’s self-reliance, but also benefits its next round of funding — which is not guaranteed and rarely happens quickly. Another incredibly valuable financing solution that CDW provides is lease financing. Through its lending partners, CDW can extend up to $30 million in nondilutive capital to early-stage growth companies. This approach offers an efficient way to reallocate capital costs to operating expenses and can help extend runway by 20 to 30 percent, not to mention provide a buffer of cash for unanticipated capital events.

Access to Cloud Management Tools

Many startups recognize the cloud’s importance to helping manage their operations and processes, but as things scale, cloud management costs that were once manageable can spin out of control.

This is why visibility is key. While tactics like metered consumption can thoughtfully be used to keep usage in check on platforms such as Amazon Web Services or Microsoft Azure, a broader understanding of your infrastructure as it grows and scales can help to highlight issues that may emerge as the complexity increases and your customer base grows. What might have worked when your organization was small may not match a much larger organization.

By working with an external service provider, such as CDW Amplified Services, you will get help right-sizing your instances and doing security and gap analysis and gain governance recommendations for things like configuring identity and access management (IAM) policies and roles and determining who has access to those resources.

Strategic Partnerships Can Assist in Navigating the Landscape

Ultimately, a major reason many issues with cash burn can emerge is inexperience with the dynamics of the industry.

And that makes sense: Not everyone is a veteran startup pro, and your first time trying to launch a new business in the world of startups might get a little bumpy if you don’t know what you’re doing.

This is a great opportunity to collaborate with a larger partner like CDW that knows the ropes, has seen the potential pitfalls and can help pinpoint opportunities to scale operations in a cost-conscious way.

Every day represents another draw-down on a startup’s burn rate. But with a careful eye toward operation costs, that burn rate could move a little bit slower, and help you find your way to properly scaled success.