Winter is coming for the global economy: 8% inflation, China in lockdown, a war in Europe, plunging capital markets, a pandemic that won’t end and a looming recession.
But for the tech and startup world, winter is already here. The stocks of public software companies have fallen 80% to 90% from their highs, startups large and small are laying off workers in droves, and VCs are publishing a slew of blog posts and PowerPoint presentations advising their portfolio companies on how they will need to survive for years without new funding.
The tone of the moment is that of uncertainty — the likes of which most of us have never experienced. No one knows how bad things will get or for how long. The rational response for many leaders is to batten down the hatches and prepare for the worst. This means canceling investments, freezing new hires and conserving cash.
However, prior recessions have taught us that the companies that cut the fastest and deepest — slashing costs, laying off workers — are not the ones to thrive on the other end of recessions. By going on a starvation diet, they become weak and have less ability to seize opportunities as the economy bounces back.
Layoffs are particularly destructive to company culture, lowering morale, engagement and productivity among remaining workers. They diminish internal corporate know-how and damage the image of the company with customers. The net result is that companies that resort to layoffs to survive adversity often end up less profitable and can struggle for years to regain their footing.
Limiting the number of full-time employees and using freelancers is one way startups can play both defensively and offensively to increase their options while controlling costs.
The takeaway? Playing defense in a downturn is not a recipe for success.
Often the companies that come out on top are the ones that find ways to play defense and offense at the same time. They end up taking market share from competitors and put themselves in position to dominate in the boom that inevitably follows.
This is not an easy balancing act. In the 2010 Harvard Business Review study, Roaring out of Recession, the authors found that a key element of success was the ability to reexamine and reconfigure the entire operation to reduce costs and increase flexibility.
For startups at the Series A or earlier stages that have a war chest of cash, there is a way to easily extend runway while maintaining flexibility and optionality: freelancers.
Freelancers can help keep your company’s burn rate low if you employ them for rigorously defined and budgeted projects. The scope and spend can be limited until there is clear ROI at a small scale. Once positive unit margins can be validated and revenue models become clear, freelance talent platforms can enable a working strategy to be scaled flexibly.
Finding durable product-market fit requires much experimentation on product as well as sales and marketing. Here are some ways freelancers can help you manage burn while you work toward product-market fit:
Testing product fit
An early-stage company may not have the capital to build a full-fledged sales department and run experiments to test product-market fit, and time is also a factor: It can take months to build a sales team from scratch.
We worked with an early-stage HR platform that was looking to secure the product validation needed to raise seed funding. They used freelance sales reps to test the viability. Within 30 days, the company had generated over 800 leads, built a prospective customer pipeline worth $750,000 and booked over 15 interviews with senior HR executives.
This data provided enough proof of concept that the company was able to raise a $1.5 million seed round. By using veteran freelancers and only paying per lead, the startup was able to show evidence of product-market fit while keeping burn at a minimum.
Saving costs on customer acquisition
Another company we worked with, an Airbnb-like platform that has raised over $60 million, was spending six-figure sums on Facebook and Google ads. Their problem was, almost 40% of registered hosts were not taking the final step of listing their properties on the app.
The company’s head of sales was convinced a more high-touch approach would increase conversions. But instead of hiring a full sales team, they used freelance sales reps to convert the churned leads. In over six months, the company was able to increase conversions by three times and reduce host acquisition costs from $300 to $110, dramatically lowering burn.
By deploying freelance sales talent efficiently, the company could optimize its sales funnel over time and reduce CAC to a reasonable payback period.
Take the “default alive” approach
Limiting the number of full-time employees and using freelancers is one way startups can play both defensively and offensively to increase their options while controlling costs.
Y Combinator founder Paul Graham set out the difference between companies that are “default alive” versus “default dead.” “Default alive” startups have enough growth and runway to break even without needing further funding. Graham wrote that the No. 1 killer of early startups is hiring too fast in an attempt to grow. But if you don’t hire at all, you risk not growing enough.
In today’s uncertain market, using freelancers is a way for companies to find or deepen product-market fit without betting the farm. By doing so, they can give themselves a better chance of making it through the winter default alive.