Sustain the Future of your Business (Leading your Startup through CRISIS Step #4)
Sustain the future of the business. That is your core assignment as a leader of a startup in this crisis
Welcome to the fourth episode about how to lead your startup through C.R.I.S.I.S. We’ve already talked about the need to communicate daily, to reassess reality, and to instruct your people clearly.
I want to get to the core of (what many people feel) is the core of adapting a startup to a crisis situation such as this one. It is to make the numbers match with the expected future. In other words, we’re looking at potentially cutting costs.
The four blocks I’d like to explore with you today are:
Can we see any other options before we have to resort to layoffs?
If we do have to resort to a layoff, can we then target a one-time-and-done layoff, to the extent possible?
In the way we designed the layoff, can we focus everything on preserving the core?
Within the tactics of exactly who has to go and who can stay, can we differentiate enough by function and by level?
Let’s look at these four, one at a time.
First of all, many startups, when a lot of their market has disappeared, or when their customers are no longer available, or can no longer sustain the payments, have to explore a significant reduction in costs. But even if that is the case, I would always urge founders and leaders to look at other options before layoffs.
There are many, many different, other options available. They typically have the advantage that the layoff is not such a huge event for the company culture. Plus that you may be able to rescale faster later on. So I want to stress that a layoff is actually quite disruptive to startup culture.
Layoffs are particularly disruptive for a startup’s culture
Now, no company likes to do a layoff, and it’s always a big emotional event. But the difference with a layoff in a mature company is that somehow it’s expected. That it happens every few years. The old-timers have gone through several and can reassure the newer people, well, this happens. It’s just part of the deal.
Whereas in a startup, everything is really focused on the future. On that big payoff of doing an IPO. On changing the world. Quite idealistic in a way. And if you have to resort to a layoff, it really means that you are piercing that dream that many employees in the company still have.
Most startups also employ primarily younger people, which means that many people are early in their careers and may never have gone through the pain of a layoff, and that’s why a layoff can be so disruptive to startup culture. My message to founders typically is: if you can avoid it, then try to.
Many alternative options, depending on your jurisdiction
Now there are many alternative options. I’m not going to mention all of them here, because it depends from country to country. But let’s look at certain categories.
Such as, is there a way to let people do “short work?” In many countries, if you reduce the availability of employees to even 20%, then the government can pick up a lot of the rest of the salary for a while. Some countries support furloughs as well. And of course, there’s also other options of reducing costs, such as bringing down expenses: bringing down travel is something we’ve already discussed in the previous video.
There are other options in terms of are there certain people that we have been overpaying in the past? If so, can we look at salary reductions either across the board or targeted towards specific people?
In many countries, the government supports layoff alternatives
Now, there are a lot of government support available, so it makes sense to target the reductions in costs to the programs that governments have available in the country or countries where you are based.
The way I would look at it is, on one hand, how much is being supported by governments and other organizations and can we target towards that? And on the other hand, is there a bigger option with this, than with the other options, of rapid rescaling?
Which option best allows for rapid rescaling?
In case the crisis does not last as long or, as many people expect, there is a V-curve, like a really rapid growth after the crisis is over. Is it then possible to still have these people on board, have them be productive right away?
Famously, many companies in Germany, in the financial crisis were able to use this “Kurzarbeit” or short work, a program funded by the federal government, to keep everyone on the payroll. But have them all work at a lower degree. So that when the crisis was over, they were able to just put everyone back on 100% and therefore restore the capacity right away.
Now I understand that if the scenarios we’re looking at are very severe, then most likely you have no option but to go for a layoff. For example, If your business depends on office workers going out or on travel or on other industries such as retail that have been devastated by the financial crisis and the Covid-19 crisis at this stage.
Of course, you will have to reduce capacity much beyond the 10–20% reduction that other options could support. So the key message there is: target one-time-and-done.
Repeat layoffs destroy all remaining trust
Targeting one-time-and-done… why? Because it’s not just layoffs, but especially repeat layoffs that destroy all the trust in management of a startup company.
Many startups can explain, especially in terms of a crisis, why a layoff is necessary, but if it has to be layoff after layoff, then you basically lose all the good people that you wanted to keep. Essentially there’s no more future for the startup.
Cut deeper than strictly necessary
That’s why I typically recommend, if you do have to resort to a layoff, then cut deeper than strictly necessary. So if your scenario says that we have to cut about 20%, then try to get to 25% or maybe even 30%, just so that you have a little bit of margin and won’t have to cut further, than necessary in a second time.
Okay, so now of course you want to make sure that in this calculation, you include the low performers and all the non-core projects.
Include all low-performers and non-core projects
This is primarily so that when you also let go of low performers, it doesn’t seem a second wave. It’s basically one big bang and everything is done.
For non-core projects, I typically think about explorations of new products going into new markets, maybe new business lines. The problem there is typically if you let go of a few people, but you still leave a core there, then they won’t have critical mass anymore to actually bring you success.
So it’s much better to cut these projects altogether and then maybe restart them later. Potentially under new leadership when the markets turn and there’s a big growth spurt.
Bite the bullet when you have to
There is also the advice, bite the bullet when you have to. What I mean with that is: once you decide that the layoff is necessary, then actually set it in motion right away.
Do not sit on the fence and say “We should explore it…We should already draw up plans who is going to be affected and who not, but we haven’t decided yet if we’re going to do it.” A layoff doesn’t work that way.
It works absolutely top-down, waterfall-style. So you have to take the principal decision before you can actually start communicating to your people that a layoff may be happening, asking the managers to put the list together and then executing it; typically in a two-three week timeframe.
If you don’t know exactly how to do it, the best is to ask an experienced HR-person, HR-manager or leader. They’ve typically gone through this many times and can help you. Not only to do this in a proper way so that both the “survivors” and the “victims” are respected, but also to follow the legal guidelines in the country or countries you are based.
Now, in looking at where to cut, I would always say “preserve the core.” What this means is you have to reimagine your business a little bit smaller than before. Think back about the time when you were still in a garage or when you were just starting, before your Series A.
Revisit the core business model
Think back about the core business model. There typically is one key product that serves one key customer group in one specific way—and that is what I call the “core” business model. Now from them, you’ve probably grown into areas like new geographies, new products, maybe different channels—and that is the “non-core” of the business model.
Sustain the gross profit drivers
Typically you want to make sure you keep sustaining that core business model and the gross profit drivers that it has. What are gross profit drivers? In tech companies, that’s typically engineering capacity, especially the development of new features which then drive the gross profits.
In other words, if you have a product that is very, very attractive to people, you can ask for a lot of gross profit for that product. In other words, it’s a source of differentiation. And those you want to keep.
The differentiation does not come from these new non-core projects, at least not initially. That’s why you cannot afford these at this stage if you have to do a layoff.
Target overspecialization resulting from fast growth
Also target overspecialization. This is another force against what has happened over time, most likely, in a fast growing company. You used to have maybe one service person and then they became five, and then they became ten.
And then, naturally, as you started introducing managers, they started specializing service people between “you are for the low level service customers, you are for the mid-level and you are for the high level.” Or maybe “you are first-level support and you are second-level support.”
That overspecialization is something that you can target where it’s easier to cut a few functions; by saying “let’s just cross-train people so that they can do everything.” Rather than focusing on the critical mass in each of these tiny little buckets that remain.
Target overhead and speculative projects
The other thing that we want to target is overhead and speculative functions.
Overhead function: I’m thinking primarily about finance, admin as well as management functions in all the other line functions. As well as other advisory functions.
Speculative function: I already mentioned are primarily growth projects, new areas of exploration, things that are not going to pay off in the short term. Frankly, you cannot afford these when you’re doing a layoff. In the future, after you’ve done the layoff, after you’ve covered a little bit deeper than necessary, it may be possible to restart those. But probably the world will have changed, so you will want to restart them anyway with a slightly different direction.
And finally, when you’re down to the level of who is actually going to be affected, then it is key to differentiate by function and by level. So here are some basic rules that I always give to startups I work with, if they have to go through a layoff.
Line functions over staff functions
First, prioritize ‘line functions’ over ‘staff functions.’ Line functions are the ones like product, sales and support that really produce the core of the business. Whereas staff functions are HR, advisory, legal, but also some advisory functions within the line functions. For example, an expert on sales operations is more staff than actual quota-bearing sales people. We want to prioritize the line functions because they produce the business. Whereas staff is more about making everyone else more productive, and that’s not the first priority now.
Output over oversight
Second, focus on output over oversight. It’s a little bit related there, but focus on the people that are actually producing work day-to-day rather than overseeing others. For example, you would prioritize the people that are delivering service capacity every day over people writing processes for the service people. Even though over time that might result in higher productivity. Again, it is something you just cannot afford right now in times of a layoff.
Today’s business over tomorrow’s
Third, we already mentioned, try to prioritize today’s business over tomorrow’s. Two reasons:
You still need the cash coming from today’s business.
Tomorrow’s business will most likely have changed to such an extent that you may need to restart it. Even if the market starts growing again.
Workers over managers over leaders
And finally, and this is actually the most important point of this entire episode, prioritize workers over management.
I want to stress this because this is something that I see go wrong time and time again. The top down nature of a layoff results in the fact that the leaders of the company want to keep the people they work with directly. In other words, their senior managers and the senior managers want to keep the lower level managers. Because of their authority, typically they will get to a selection of people for layoff that are all deep down in the organization at the front line.
This is fundamentally unfair. A lot of people in the company will say, well, what the heck? Why are we getting rid of all the workers that actually produce everything day to day? Whereas we’re leaving all these managers, who don’t do anything, in charge. They will still be producing all of these ideas, but there will be nobody there to execute them anymore.
And this is why it is important to proportionally cut more in management layers and even more in the leadership layers. Then in the front line workers, that is a way in which you can sell this layoff as fundamentally fair, whereas most of the working capacity is still there:
“We did cut more in management. We cut even more in leadership, for example, in all these speculative projects, so that it’s a leaner organization. With more people just focused on doing the work and less on speculation and oversight.”
That is what I would say in terms of how to sustain the future of the business:
Explore all other options before layoffs.
If you have to do a layoff, then target a one-time-and-done.
Where to do the layoff? Focus on preserving the core.
Who is going to be affected by the layoff? There you have to differentiate by function and especially by level.
So not a funny topic, but I hope it helped give you some guidance.
The next video will be about the parts after sustaining the business: how to inspire positive action.
To get started right away with bridging the crisis in your startup, go to crisis. We put together all resources there that we’ve mentioned in this video: The crisis action plan, a one page crisis bridging plan, other videos, and more.