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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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.