Tech startups have not been immune to the recent economic downturn. Many have been put in a position where
fundraising will be next to impossible, so they need to find other ways to survive the dark economic winter
until spring arrives. But there’s no reason why any startup leader can’t find a way to guide their company
through these difficult times.
For startup leaders looking for a little help, Midstage Institute co-founders Roland Siebelink and Doug
Miller have put together a two-part podcast in which they discuss what startup leaders can do during the
current downturn and how to lead during lean times. The second part of their conversation shares practical
steps on how to cut costs in the short term and position your startup to thrive when the dark times are
- Why it’s critical to focus on the parts of your business that are generating cash in the short term.
- The steps to take before you start to lay off employees.
- Why it’s vital for companies to only have one round of layoffs, even during a downturn.
- How to know what employees should be let go if layoffs become necessary.
- How reducing costs by 1% each month can make a huge difference over time.
- How to create flywheels that can be ready to take off and thrive once economic conditions improve.
Doug Miller: Keep focused on sales, but keep focused on profitable sales of
profitable products to profitable customers. Work with your finance and sales
team to figure out how you model out who those profitable customers are? Realign
your sales team, realign your outreach in order to really focus on those. And
don't go outside of those areas. Every deal you sell needs to generate cash in
the short term, not over 18 or 24 or 36 months, but in the next six or 12 months
needs to generate cash.
Roland Siebelink: Absolutely. And your sales team can actually be a huge
lever in driving more cash for the company, especially if you optimize them by
selling one to your contracts with payments upfront. And if you sell to
enterprises, that's actually much more surprisingly easy than you would think.
You can even give quite a discount for that. A lot of companies in the COVID
crisis and in the previous crisis were able to manage through that just by being
very creative with their cash optimization.
There's one point we haven't addressed in the short-term "cash is king," Doug,
which is the sensitive part about, do you need to lay off people?
Doug Miller: The short answer is probably yes. And there's also a question
of do you need to lay off people and/or are there C players on your team where
this is an opportunity to make sure that they're out of the organization? In the
last 24 months before all of this happened, hiring was very hard. A lot of our
clients have definitely had people who were doing a good job in some roles and
were doing an adequate job. But now in this new reality, those people may not be
cutting it anymore.
Roland and I have seen this in every company we've worked at. You always have A,
B, and C players, and they change over time. You really have to take a hard look
at your organization first and say, "Okay, who are the C players? Let's identify
those people." The key thing here is don't take action yet. The first thing is
to figure out who are those C players.
Roland Siebelink: Can I just add to that point? This is not a judgment on
these people as a person, like they will always be a C player. It's just as
often a function of bad fit, or maybe a role that was never thought through, or
maybe something that used to be thought of as strategic that's no longer that
important. Of course, it can be a question of bad performance. But that may very
well be because the person is not the best fit for the job as we thought they
would be. Lots and lots of factors, and it doesn't mean we condemn them
internally toward starvation or something like that. I actually think of it much
more as how we can free up people's futures so that they can find a job that
fits them a lot better.
Doug Miller: Very well said. These are people that are C players in their
current role, on their current team. Think about all the great sports legends
who have moved teams and then had wild success throughout the years. I think
it's really good that as you're thinking about these people, it's how they're
contributing to your company and the cash flow of your company and the culture
of your company through these stormy seas. It's not a judgment call about them
at all. Very, very well said, Roland.
Roland Siebelink: And I'd like to also contrast what you were just saying.
In the good times, hiring is very difficult. We've all just lived through that.
What often happens is that a team leader will say, "Well, I know this person is
not really performing, but they're still doing something. And I know if I would
lay them off or ask them to leave, I could never replace them with anyone else."
That is a real indication of a C player. And yes, in the good times, it may have
been too hard to put pressure. But now is the time to act on those people.
In that case, you can often avoid a big layoff altogether and essentially reduce
your cost base while not actually reducing the performance of the company all
that much. We've even seen some companies improve overall performance just
because some people felt like they were in the way or they were delaying things
or just simply no longer there.
Doug Miller: Very well said. I will tell you that you should identify those
C players, you should have that list, you should do it in a fair, legal way
that's fair to the people, obeys all laws in your local jurisdictions, so please
work with your HR professionals.
Before you actually decide to have them separate from the organization, you do
want to do your financial models to figure out if that's going to be enough so
that you can survive this winter. The worst thing you can do is do a fast lay
off of the C players and then realize a few weeks or a month or two later that
you have to do a reduction in force. Now you're laying more people off and now
it's not a layoff and now the company is a good place. Now there's been a drip,
drip, and that's the one thing that you cannot do in this environment is have
multiple rounds of layoffs because you'll destroy the culture and the motivation
inside your organization. Once you identify those C players and you've figured
out how to optimize your cash, now you have to work with your finance team to
come up with realistic financial models for how much more you need to cut given
the current environment so that you can survive.
Roland Siebelink: Yes. And a variation of that - I 100% agree with that -
and a variation of that that we sometimes see is when companies start working
through older strategic priorities and they said, "Well, that project doesn't
seem strategic anymore. This is too speculative." Again, don't do the same and
start laying off all those people.
For two reasons. One, you would create that same drip effect that is so damaging
to the culture of the company. Better to have one bigger action and then have
the pain be gone and everyone feels safe. The second reason is very often in the
past, you've put your most talented people on those more speculative projects,
and there should not be a one-to-one relationship just because you canceled the
project that that person has to go. If you believed in their talent in the past,
you think they still have it, it may actually make more sense to put them back
into a core operation and maybe look in that core operation like "Did we not
have somebody who was performing less that would be a better choice for putting
on the list."
Doug Miller: Very well said. You have to figure out where you're going to
have profitable cash. You need to figure out who your C players are. You're
going to figure out which projects you're not going to keep around. And you're
going to figure out your financial model, exactly how much of your expenses you
need to cut and if that's going to impact a head count past those C players
given the environment.
Now you really have to work with your executive team to come up with the full
list of people that are going to be impacted by this and for the people
remaining, what their new assignments will be. And then and only then are you
ready to actually do the dreaded lay off of someone at the company. And these
are not fun. Roland and I have done dozens of these. No one wants to do this.
They're the least fun part of leading a company. But you have to do the right
thing for the company overall and for the employees that will remain. And so,
making those hard decisions now and making them quickly and making them only
once is going to be the best thing.
Roland Siebelink: Let's say on top of that, making them fairly and
professionally. One element of the fairness I want to highlight, in most
organizations, there's too much management and not enough contributors. This is
also an opportunity to correct that. Whenever we run one of these threaded
layoff projects - and I can assure you, they're definitely not fun; the only
thing that's even less fun is seeing an entire company go bankrupt because they
did not make the correction on time.
One correction we very often insist on is that there's a proportionately higher
percentage of leaders and managers that are put on the list than individual
frontline contributors. Why? Because it's those people that are often working on
the more speculative projects and on things that are not providing immediate
value to the company. And the worst is if you were to cut the capacity for
generating the business at the frontline while keeping all those speculative
projects in place. We typically want to see relatively more leaders and managers
be put on the list so that the company that survives is a contribution machine
with a lot of individual contributors but not too much management.
Doug Miller: Well said. If you're thinking you need a 10% reduction in
costs, we would challenge you to go to 12 or 15%. And if you land at 15%, then
you want to think about - that probably means your executive staff needs to be
cut by 20 or 25%. Your directors and VPs are probably being cut at 20%. Your
managers are being cut at 15 or 12%. And then your frontline employees are only
being impacted by 2% or 3% or 4%.
Roland Siebelink: Because the costs are typically lower at the frontline,
you will still add up to the percentages that Doug was outlining upfront.
Doug Miller: Exactly. You can get a lot of scale out of that. Never easy
conversations, never fun conversations, but necessary conversations in the given
Roland Siebelink: There's also a few very easy buckets that are typically
part of this cost reduction effort. I would highlight recruiting. I would
highlight training expenses. And also, in general, just expense claims that
people have, particularly, many sales forces. I learned this in the media and
advertising world in London where they pay people generally extremely low
salaries but they give them almost unlimited expense accounts. They were
actually encouraging people who are just out of a university to keep inviting
all their friends for lunch or for dinner or for drinks, all expenses paid. Why?
Because that helped them generate the stories and the business contacts to drive
business. But also because in lean times - and these are very, very cyclic
sensitive industries - in lean times, it gets much harder to cut everyone's
salary by 10% than to say, "We're cutting the expense budget by 70%.”
Doug Miller: Yes, very well said. And that was seven zero, not one seven
Roland Siebelink: It's very easy for leaders to say, "Folks, the expense
budget has gotten completely out of hand. We're not doing expenses for a month
and then we're going back to 20% of what it was before." Try to do that with
Doug Miller: You won't have any employees left. The other place I would look
at is your marketing budget, especially how much you're spending on outbound. If
it's DR, if it's profitable, if it's generating cash, then spend the money. If
it's doing longer term brand things, if it's more about rebranding, it's more
about those speculative things that you think have opportunities for long term
growth, right now is the time to cut that stuff back. Stop it, put it on hold,
and then wait for six months and see what's happening and how long this winter
is going to be.
Roland Siebelink: Yes. Building on that, what we often see in growing
startups is what I would call experiments gone out of hand. Marketing
departments that are running six, seven, eight channels at a time, but when you
look at the numbers, almost all leads come from one or two channels. This is the
time to start saying, "Well, actually we have one bread and butter channel and
then maybe one channel at a time that can compete against it, but not seven or
eight." All of these have a lot of fixed costs associated with them, and it's
very easy to just reduce costs there without actually seeing a big impact on
your lead generation capacity.
Doug Miller: Very well said. All those speculative things - whether they're
marketing activities or whether they're products, whether they're solutions or
their new regions, those are the things that are speculative - now is not the
time to invest in the future. Now is the time to invest in the now.
Roland Siebelink: Absolutely. On the engineering side, we can highlight any
recoding or re-platforming initiatives as things that are typically not apt to
do in a time like this.
Doug Miller: Unless they're going to lead to immediate cost savings. If
you're going to reduce your AWS bill by 20 or 30%, then maybe those are very
well worth it. But definitely not for new architecture, new technology, cool
Roland Siebelink: Or rewriting an entire platform that would pay off in five
years time. Those are the things we're looking to call from short-term cash
Doug Miller: Awesome. Ultimately, we're doing all of this to actually get to
an infinite run rate? Can you get to break even, whereas we talked about
earlier, regenerating cash.
Roland Siebelink: Absolutely. That's the goal that if you can get to it
would be ideal. That you are what Y Combinator calls default alive. Even if
you'd never raised investment anymore, you would at least stay alive. If you can
get to your 30% free cash flow, you're in the top rate of startups, the top tier
of startups, and that's even better. But at this point in time, survival comes
before thrival. You want to make sure that you are default alive and hopefully
will never need to raise money again.
It's okay to say at some point in time, if we want to start growing faster
again, then we would make a bid to attract investment. But be ready to do that
on your own terms when the market is more attractive again, and that you can
wait the winter out to see when real springtime is there again.
Doug Miller: Something that I've learned from Roland is the power of the 1%.
If you can reduce costs by 1% on a monthly basis, you actually get 13% savings
in year one. Think about that. It's a 1% savings each month, 13% for the year
that scales up if you can get to 2%. But there's many times that you can look
across the board and say, "Well, if we reduce all of these things by 1% across
the board, you can have massive, massive savings as you compile one and two and
three years on top of that.
Roland Siebelink: Yes. And I would say that that's a really good strategy to
make the cost sustainable in the midterm. One percent is not going to cut it in
your initial resetting plan, of course. But after you've gone through the short
term exercises, then it's about time in the midterm to infuse more of that cost
consciousness in the company. What Doug is suggesting with a 1% every month is a
really good target to keep people cost conscious for a longer time.
The other thing we often recommend in that case is to work with what we call
widget targets. And that really means that for every department, we identify the
units they produce, whether it's leads for marketing or features for engineering - we
have a lot of other examples, of course - and we have managers commit to
volume targets as well as cost targets on these widgets. That makes their
business a lot more tangible than if you just try to manage them with a
It may not actually deliver much into the very short-term, but in the midterm,
you get that same compounding effect that Doug was just referring to. People
take more control of their part of the business. They get much more cost
conscious. And more importantly, that one widget target starts being prioritized
over everything else. A lot of the supplementary activities that may not lead to
business results right away just become less attractive in the eyes of the
leaders and the managers, and that drives enormous efficiency.
Doug Miller: Very well said. Thinking about the midterm, what are the other
things to think about there as we move out of the immediate cost cutting, you're
now trying to instill cost savings, spending money wisely, making sure focusing
on cash flows. We talked a little bit about widgets, and that's really about
optimizing the end to end delivery and optimizing the cash flow of the
organization. Everyone is held accountable but also can innovate inside their
As you think about that, how do you think about also focusing on long term
strategic differentiation so that when winter ends, you can be ready to seize
the market from your competitors?
Roland Siebelink: Before we go there, I would say there's still one or two
things you can still do in the midterm that are really good while you're in
between the winter just hits and now we're waiting for spring to arrive. One is
to build on that widget target and be able to set the mode of the company. And I
think of this - a mode is essentially if you imagine a human or an animal body,
it's in the mode of doing something; the entire entire body is focused on, I'm
currently eating or I'm currently sleeping, or you can imagine some other modes
that the body may be focused on.
For a company, the mode is also the overall message that you send to the
company. Our focus is this. And so the mode up to a month ago for most startup
companies was growth at any cost. Now, the mode is going to be cost savings at
any price. In the midterm, it's going to be more like a pendulum where you say,
"Okay, either we are still producing the same but at ever lower costs - probably
more of what you're focused on now - and then as things started improving a
little bit, you start saying, "Can we at the same budget start producing a
little bit more?" And when I say more, I mean more widgets. For marketing, that
might mean, can we produce a little bit more leads at the same cost. For
engineering that might mean, can we produce more features at the same cost, and
It's that swaying between how do we stay efficient but still start focusing on
growth. That is something that you can Institute in that midterm. You also
mentioned end to end, Doug. And I think that's actually the one that pays off a
little bit slower but much stronger than anything else over time. It's to start
making people conscious of the end-to-end value stream. A lot of the learnings
there come from lean management, the Toyota production system, and other areas
like six Sigma, where the realization is that optimizing department by
department is one thing but where the real cost savings are to be found is the
flow between the departments. End to end, all the way from the beginning to the
We often work with companies to institute what we call value engines, and all
the engines have to sync up together and work in unison to drive the real value.
If you make people conscious of that and you have them focus on how we can make
sure there's fewer mistakes, all the handovers are correct. Can we move them
faster? Can we be more in line with just what the customer is asking for and not
just a lot of other things that have slipped in historically?
On the marketing and sales side, we're often so happy with just a 10% efficiency
increase. I will tell you from my own experience in this work, it may not come
quickly, but after six months to a year, you can often see 50, 60, even up to
90% efficiency increases just by having the teams focus on how we can make this
end-to-end flow more efficient. And that's definitely something I would see
companies focus on in the midterm while the initial crisis stuff has been taken
but while you're waiting for spring to really kick in.
And then going to the long term, this is when you are starting to see some new
opportunities arise. When new capital is becoming available. When you can
actually start making pitches again for people investing in you. How do you stay
efficient while thriving in the long term?
I think the learning that you can take out of these economic times is to really
be more and more conscious of the core differentiators that you have. Where do
you really make a difference? And could you turn those four, five, six factors
into a fly wheel that drives everything that you do and where you should truly
maintain your differentiation and keep investing to be unique in that factor.
Doug Miller: Totally great. And through this time period, as you build out
the ability to optimize the cash flow, get your end-to-end processes refined, as
we come into the spring, you're going to be ready with these flywheels turning,
creating cash, creating happy customers, which will then allow you to get back
into some of those speculative projects, which will increase your value - maybe
not 10X better than competitors, maybe 20, 30, 40X better than your competitors - so
that you can own those markets, make them incredibly defensible. And then
you can look at how do I move into adjacent markets? How do I sell this to a
slightly different customer? How do I expand into Europe or expand into North
America, expand into South America?
That's really what we're looking for in these types of environments. You can
almost think of a really, really bad Jimmer King. This is going to make you into
a very fit organization. You're not going to enjoy it. It's not going to be that
much fun, at least initially. But as you build a flywheel and as you get into
shape, your muscles will stop hurting. You'll actually feel good. The endorphins
will be flowing. Organizationally, people will be in a flow. People will know
what they have to take and what they have to deliver along the value chain. They
don't have to think, they can just do their jobs. And that's when people really
have joy at work and organizations thrive.
Yes, we started this with doom and gloom. And yes, there's a lot of work to do
and we're not to spring yet, but when spring comes - and it will come - the
companies that survive are going to be the ones that are really poised to
dominate. And that's what we want you all to be.
Roland Siebelink: Yeah. That journey from product-market-fit to
product-market-dominance is really what we described in our first book, Scaling
Silicon Valley Style, that has that flow from not just starting with
distribution,but then deepening the product, disrupting your market, making it
defensible, and then duplicating across different adjacent markets to have a
truly defensible fortress.
Doug Miller: Very well said. I think right now we want to talk a little
bit - just in conclusion here - that winter is here. We don't know how long it's
going to be. But for valuations, it may be 24 months. Everyone should realize
that and everyone should be operating under that assumption.
Roland Siebelink: Assume it will be hard to raise cash in the next 12 and
assume that your valuations will be a lot lower than expected for at least 24.
Doug Miller: Exactly. You need to have enough cash to survive 12 to 24
months. And if you can get cash flow positive, that's how you're going to unlock
additional investments during this time, potentially. Regardless, you'll control
your own destiny. And right, now it's all about controlling your own destiny.
Growth doesn't really matter. Cash matters. If there's one thing you take away
from this, please remember cash is king.
Roland Siebelink: Cash is king. As they say, revenue is vanity, profit is
sanity, but cash is king.
Doug Miller: Yes. Very well said. In the short term, we want to make sure
that you're all acknowledging what's happening in the world. The world has
changed. Your perception has to be crystal clear. You have to go look in the
mirror and see what's approaching your company, your organization. Next, you
really need to reassess where you're making money, where costs are too high, and
as much as you possibly can, make those cost cuts all at once in a prudent,
timely, strategic manner. And then communicate to the company that you now have
the organization going forward that's going to be all to thrive through the
winter and survive, and then be positioned with a flywheel by doing that hard
work of that process engineering, which sounds really boring, but small little
steps month over month get better and better, as you then have flywheels coming
out of this winter, so in the spring, you're ready to soar.
Roland Siebelink: Absolutely. I think that's a really good summary of what
we try to discuss at length in this initial podcast recording. We plan to make
more detailed recordings and blog posts about some of the themes we brought up -
and I've mentioned some of them already. But this is our first big take on how
to handle dealing with the downturn and how to be an exemplary leader in these
Doug Miller: Awesome. Great job, Roland. I know I've learned a lot from you.
I learned a lot from our clients. I hope that these tips are helpful to everyone
out listening. Just buckle down; it's going to be a wild ride. But smooth seas
will be coming in the future.
Roland Siebelink: I learned a lot from you, as well from our clients. That
is one of the joys of working at the Midstage Institute, to be learning from
startups every day. And if founders need particular help, then reach out to us.
We are at [email protected]. We can always help mid-stage companies. Our typical
target group - to repeat - is companies with $5 to $50 million ARR, between 25
and 250 employees. And those we can really help deal with the downturn and get
through these lean times.
Doug Miller: Everyone, have a wonderful evening, morning, weekend,
afternoon, or any other way to find the time that's coming in the near future.
Thank you. Roland.
Roland Siebelink: Thank you for listening, everyone.
Roland Siebelink talks all things tech startup and bring you interviews with tech cofounders across the