Breaking Point: How Fixed Costs Menace Startup Ventures

As the post-pandemic boom recedes, venture-backed startups in the US tread unfamiliar territory. Inflation and fears of a recession have disrupted VC funding, leaving these small businesses scrambling for a silver bullet to scale their products and services. 1840 & Company, a pioneering talent solutions provider, revolutionizes startup success by blending business process outsourcing (BPO) with an accelerator model to tackle fixed costs and obtain funding. Bryan DiGiorgio, CEO of 1840 & Company, emphasizes the critical need to devise a pioneering strategy that allows startups to re-direct resources towards core operations. “This approach offers a concrete pathway to securing vital VC funding within the contemporary post-pandemic landscape, all while harmonizing seamlessly with the overarching emphasis on sustainable growth and profitability,” he says.

Funding harder to secure — but not impossible

Given the fiscal fragility of startups (e.g., a failure rate of 90%) and that 52% of them rely on VCs to stay afloat, one might speculate that the current funding drought could bankrupt most of these fledging companies.

While venture capitalists may have become more prudent in their investments, they are not short on money. In a panel interview with Mckinsey & Company, Jenny Dreier, Director at EQT Ventures, claims that VCs are sitting on a “record pile” of capital and are just waiting to finance the right startup.¹

That would be one that can demonstrate sustainable unit economics, according to the VCs invited to the panel. No longer fixated by entrepreneurs pursuing unconditional growth, VCs now aim to support visionaries who can deliver long-term profitability.

Fixed business costs and the scaling risk

Yet, proving scalability to VCs is no easy task.

Fixed business costs in particular pose a major problem to most growing startups. Customarily defined as costs incurred independent of production and profitability, expenses such as rent, utilities, compensation packages (including benefits and severance), and employee training can be back-breaking to unprepared businesses.

Scaling startups often struggle matching supply with demand. During economic windfalls, they may lease larger offices to accommodate more hires, but may find a pinched talent pool. Conversely, during a downturn, they may be burdened with costly severance packages when they would much prefer to focus on core operations. In short, fixed business costs are risky because they cannot be easily manipulated and can only be offset by revenue from sales or services.

Startups and VCs find themselves entangled in a game of chicken. The former group, once relying on VC funding to cover fixed business costs and test their business offering, is now asked to demonstrate proof of concept. Meanwhile, VCs, who generously funded startups in the hope of finding a unicorn, now seek sustainable ventures that do not reveal themselves due to fiscal challenges, including fixed business costs.

In 2022, running out of capital and a lack of investors accounted for 44% and 47% of startup failures, respectively.² If startups do not adapt going forward, expect both causes of failure to be even more prevalent.

Implementing business process outsourcing with a startup accelerator

Business process outsourcing, or BPO services, provides startups and VCs a way out of this conundrum. More than a simple remote hiring solution, BPO services involves entrusting support operations such as accounting & finance, marketing, and HR to vetted talent across the world.

BPO services confers multiple advantages to startups looking to scale:

• Outsourcing allows startups to significantly reduce their physical footprint and overhead, removing up to 70% of fixed business costs
• Delegating support operations frees up capital that can be better used for innovation, growth, and delivering superior products
• Hiring remote freelancers saves on onboarding & training costs and benefits while gaining the advantage of round-the-clock productivity
• Fielding an international team means drawing from a broader talent pool and fostering a more diverse and inclusive work environment

A startup that leverages remote global talent can shed unwanted fixed business costs and benefit from a more cost-effective workforce, as shown by Deel’s explosive success. By outsourcing most processes to the freelancer market, the payment company became one of the fastest growing ever, now valued at $12 billion.  

However, going fully global is easier said than done; many startups lack the requisite experience to navigate local benefits, payroll, taxes, and compliance, among other legal complexities. Therefore, BPO services should be paired with a startup accelerator like 1840 & Company that has proven expertise in vetting, hiring, and managing global talent.

VCs take note of startups’ business models, and one that promises to both reduce fixed costs and increase profitability may be precisely what is needed to entice their investment.  

A new strategy for VC-backed startups

VCs have become more discerning in their investment decisions. Sustainability, not unbridled growth, has become the crucial factor in securing VC support. Business process outsourcing allows startups to adapt to this shift. By substantially reducing fixed business costs, startups can allocate more capital to core operations and improve their performance, making themselves attractive to VC funding.