They say the best time to start a business is during a downturn because you face little competition and once you're up and running you're already back to the upswing. I guess the same is true of growing a business...
The 2008 recession clobbered my IT company - most of our customers were in the construction field and many of them went bankrupt.
We did the right thing - we cut deep into the workforce to protect what we could and that was the right thing to do. The remaining employees were able to confidently work knowing that their job was secure.
But the act of cutting deeply, and laying off people I liked and admired cause me to want to act like a turtle and to not want to venture out.
In hindsight, I should have marketed and reached out to new potential customers because other IT support companies were going out of business left and right. I estimate that my timidity after the traumatic cuts cause my company four years of growth.
If I have to do it again, I will. But afterwards I'll act like it never happened - I'll keep growing the company.
In Germany, and other European countries, there is a tool called "Kurzarbeit". It allows a company to reduce the workforces hours and temporarily cut pay. The state supports it with tax breaks. The result is that a worker only works i.e. 60%, income drops to 80% (bc of the tax breaks) and the company saves a lot of money.
The key point: people keep their jobs AND companies keep their trained staff. So when the crisis is over, they are ready to ramp up again. Also, since people keep their jobs, consumption does not drop that low.
This helped the Germany economy massively to recover from the 2008 crisis.
Not sure if it would work the same way for all parts of the economy, but it definitively works for the manufacturing industry.
I'm German, so I might be biased but I think Kurzarbeit (for our non-german speakers, it is pronounced: koorts-arbite ) (short-time working) is as close as possible to an economic wonder weapon during a recession:
People are still paid, companies do not have the full burden of wages to pay and especially do not have to go through hiring and training new employees after the episode when they want to ramp up again. It's an awesome tool to deal with a temporary situation and particularly aimed at making recovery from the situation easier (by riding it out instead of first succumbing to it and then having to get back on the feet).
Same in the Netherlands. There was always something similar, but as part of a stimulus package for the Corona crisis the government will pay part of the wages for companies that have 20%+ revenue loss, and this scales up to 90% wage payment for 100% revenue loss.
Pick up the phone or send an email. State clearly that you need to cut the costs to a specific target. Ask if there is any specific path they can assist you with such as removing features or moving to an alternate plan. Say that you are doing this now with all vendors. Don’t threaten to leave, try to be collaborative and explain that you are doing this to be able to maintain the service in the short term and long term. If they push back hard ask what they want in order to make concessions. The truth is many of your vendors will be fielding these types of requests while at the same time seeing a ton of cancellations and customers going out of business. They may view it as better to cut your bill and thereby preserve the revenue they collect that watch your account go to $0.
For large dollar value contracts you usually have an account rep/point of contact you can get on the phone.
You can explain to your rep what you are dealing with, what your budget is, and make a concrete ask. I get the sense that the larger of a customer you are for someone, the more willing they are to work with you.
Maybe I can offer an experience that made me 'see the light' (well, some light) accidentally on how sales (re)negotiations work. I'm going to be vague because this is going to make me seem petty.
I had a colleague once who was an 'office rival', you know the type of person you can't stand and are always one-upping (told you this was going to be petty, but in my defense, he started it). So one day we were moving offices and we needed something for the new office. (Sane companies would have had one person doing this but let's say we were a caricature of 'scrappy startup where everybody wears every hat'). There was one item that is basically like a 'staple' for office furnishing - let's say it was perfectly standardized desks. Or plants to put in the hallways, something even more mundane than desks.
Anyway this other guy had me beat on price from every supplier (everyone in the office was basically one-upping everyone else on how cheap they could get things, to the point where I spend days making my own cat5 cables). But I got the same quotes (within a few percent) from at least 5 suppliers, using just the standard 'what's your best price' beginner negotiation playbook. After that I thought screw this, I'll just lay it out. (let's say this general price was I got around 12k, and the 'other guy' got it for 11k).
So I went to a 6th supplier, let them do their sales spiel in their showroom, and said (pretty much as blunt as I put it here) "Listen, you probably have a great product but I don't care, I'm buying on price. Everyone else like supplier X, Y and Z have given me these and these prices" (I showed him the offers I got). "There is another guy at my office who got prices around 11k. I want to beat this other guy, and you want to sell. The only way you will sell to me is if you can come in with a price below 10k. Let's not do a sales dance here. Can you do this?".
The guy got a bit of a deer-in-the-headlights look, went "to the office to discuss with his boss" (like a car salesman but this time for real I guess) and then came back with a price a hair under 10k.
I got my petty win, then a few months later the company almost went under and the guy who gave me the deep discount called me daily for a month when he was going to be paid until a miracle happened and he got his money, but that's another story.
Anyway, what I took away from this (this was before I had had any sales training or really thought about sales) was that usually, the key to a (hard) discount is to convince the other party that it's better for them to take a smaller profit than no profit at all. And also, that it's better to make it seem that you are not the decision maker or that there is some sort of external price anchor. Not saying this is always the best global strategy; personally I value lasting relationships with good personal rapport over squeezing out every last penny, but in crisis mode it's sometimes just necessary.
I was going to quote Burroughs' characterization of Hauser and O'Brien from Naked Lunch. So anyway, here's what he said about them:
> O'Brien was the con man, and Hauser the tough guy. A vaudeville team. Hauser had a way of hitting you before he said anything just to break the ice. Then O'Brien [is friendly and encourages cooperation].
That's a fair point, and there are a number of situation dependent factors. I wrote this letter to myself because I know what I would do differently 12 years ago and I have the benefit of hindsight now. Obviously the crisis is different today, we didn't have a pandemic in 2008, there is definitely no one-size-fits-all advice, and every company needs to be figuring out the right thing to do right now. But keep in mind what ended up happening 12 years ago is that everyone lost their jobs. The letter is my thoughts about what could have prevented that outcome back then, at least partly.
Laying people off is always a large burden. Laying off multiple flights of people with latency and inducing stress (e.g. "will I be next?") is probably worse.
If the business goes under, all employees will suffer. If some are laid off and the business continues to survive, those that make it will be spared.
So from a harm reduction point of view, laying nobody off is probably worse than laying some people off.
Even if you reduce pay, people may not be able to afford housing even though they're still working for you (e.g. in the bay area). And health benefits still cost the same even if you reduce other employee associated costs.
Things are not as simple as (I'm interpreting) you're implying they are. It's not black and white, and the decision needs to be made on a case by case basis.
Certainly not thinking things are simple, or that any of your points are innacurate. I’m sure it is very tough, and maybe even the right call for the goals at that moment in 2008. My criticism was that through this lens and with the audience the OP has, the lessons of an economic downturn being basically “lay off more people” is incredibly sad from a humanistic point of view.
If the company dies, everyone is out of work. That's not an improvement.
I posted an article earlier today about expanded unemployment benefits in the US. It's not a founder's job to provide a nanny state (so to speak).
It's the job of government to look out for the people in that way.
The goal has to be first survival so that at least some of the team can be provided for. Otherwise, everyone will lose health care. But I agree, leaders have an obligation to balance this with the wellbeing of the team. If 70% of payroll costs have to to be cut for survival, pay cuts won’t suffice. Perhaps leaders should do an analysis of which team members have health care through other sources, or ensure that COBRA is paid in full. Lots of difficult choices ahead. Let’s take care of each other.
I'm probably looking to be combative due to this social isolation, but one of the last lines irked me:
> People are counting on you to do the right thing.
Only because he says this after talking about layoffs as a purely business decision. I have no moral qualms with doing layoffs, and as others discussed it might be better to do one for the moral of the employees than to be stuck with multiple rounds of layoffs.
But he talks about having plenty of cash, then cutting more than needed (which is people's livelihood)... then uses the same livelihood as motivation. Am I being overly cynical?
I think he's talking in absolute terms versus relative terms that founders are used to thinking in.
Imagine that you have $3 million in runway, but you are burning $500K a month. That only gives you 6 months of runway.
It takes perspective to zoom out to realise - "Hey, I actually have $3 million in the bank. That's a lot of money. If I can somehow reduce costs to $150K a month, I actually have 20 months of runway to figure things out."
Unfortunately, this means "cutting more than needed".
I think maybe a little. His point is that doing multiple small layoffs to avoid pain and failure ended up causing more pain and failure. He's not saying he should have cut more than needed, he's saying he needed to cut more, because fundraising wasn't going to happen and getting profitable was the only way to survive. But presumably he didn't admit that until it was too late.
The 'right thing' in this case means something like 'face reality clearly, instead of clinging to fantasy because things are too painful or scary'. If you read to the end where he says "People are counting on you to do the right thing", he's telling founders not to shy away from difficult decisions because they're afraid of what outsiders might say. The point is that if you know deep down what needs doing, you're not helping anyone by avoiding it.
Multiple lay offs creates constant fear. It destroys morale and team culture right when those are crucial for the fight for survival. But this really missed the point. The key insight Dalton offers (correct me if I am wrong Dalton) is: Get Profitable. It’s not about the cuts themselves. It’s about getting to a sustainable break even cost structure so that you survive.
> But he talks about having plenty of cash, then cutting more than needed (which is people's livelihood)... then uses the same livelihood as motivation. Am I being overly cynical?
My assumption is that "plenty of cash" is conditional on aggressive layoffs. He says "high burn" early on so I was assuming a scenario of "everyone loses their jobs within 6 months" vs "30% keep their jobs."
Having gone through several levels of the startup life and several economic swings myself, I can say this isn't mutually exclusive. Letting people go means economic hardship for them, but so does delaying a company's death and folding up the business for a larger number of people many months into the future.
A startup, by definition, is a group of people searching for a viable business model. It does not look like this in that hard moment where everyone looks at you and faults you for failing, but in the end surviving with a third of employees and potentially helping to rebuild the economy two years later is the ethically and economically preferable alternative imho.
He doesn’t say cut more than you need. He says it will feel like more than is necessary but that’s the heart of the contradiction. You can cut most to same some or you can go out of business and then cut all. This is existential. Make the right decision and you survive to have a platform to build from and help your customers, employees, community, vendors, investors, former employees. Or you can hesitate, fail, and help no one. Do the right thing. It’s hard but it’s right.
>[Triumph is a plaintiff,] a rubber dog, black and brown in color, that wears a gold bow tie, often smokes a cigar, and interacts with animals and with humans through rude and often vulgar comments, through physical actions and/or attacks.
>[The pets.com sock puppet] is an advocate of pets, the voice of pets, and often interacts and communicates directly with other animals or with humans in order to convey to pet owners how pets feel about various pet related issues.
>“Maybe they see a profit potential in the sock puppet, because they sure aren’t going to make much money overnight shipping dog food to America,” says Bob Garfield, media critic for the industry trade publication Advertising Age.
This downturn is vastly sharper and more unexpected than 2008. Time to roll out the Plan B budget and cash flow model where you lose that big customer and everyone else delays their repayment. Oh, also forget adding new logos for six months. Large companies are in a state of paralysis while they try to figure out what to do and when this will all end. You should be too.
I imagine a lot of actions you would have to take to make a small company profitable would make it be unappealing to a company with more money. Better to burn the cash and lay a giant foundation rather than just build a tiny house.
Then you can sell the foundation by saying "Look how big of a house could be here!"
Many acquisitions are merely to hire the team. Recruiting is hard and buying a large functional team is some times attractive. But yes, this is bad advice as it likely won’t materialize. In fact the best posture in an acquisition is to not need one rather than hope that is your way out. Buyers will capitalize on desperation.
Agree. The scary thing here is that we're talking about completely pausing the world economy for one quarter? Or two quarters? Or a year? There's really no way of knowing what the effects will be and the longer this gets stretched the more drastic the economic effects will be. I don't know what perspective your comment comes from but I think it's important to open a discussion on the long term effects of this type of quarantine. For example, if this leads to an unprecedented level of recession it's very possible that more people end up dead due to the quarantine.
You actually can't assume that will be the case, based on longevity data from the Great Depression. If Covid runs rampant and collapses the medical system the U.S. is facing anywhere between 500,000 to 10 million dead based on current understanding of the numbers.
Thousands/millions out of work may (or may not) experience morbid effects. They will have a harder time participating in the buy side of the economy and driving demand, and also represent missing productivity. That's nothing to sneeze at.
But thousands/millions dead are guaranteed morbid effects. And dead people are even harder to get back into the demand side of the economy (or productivity) than jobless people.
Also near the peak of an unconstrained pandemic... what should we think people's improvised reactions will look like? Business as usual, no economic impact?
The best way to not have an economic impact was not to have an uncontained epidemic we weren't prepared for. We kinda missed that step. Why would we have a choice not to have serious economic impacts at this point?
The scary thing is that many of the deaths are more or less guaranteed even if we try to treat them, until the point a cure or vaccine is developed.
>Why would we have a choice not to have serious economic impacts at this point?
That's not really a choice at this point, but we do have two paths with unknown outcomes. We can choose to focus on limiting the spread at all costs (and hitting the economy harder) or we can focus on limiting the economic effects but give up on containing the virus. Neither is a good choice in any capacity, but it could turn out that either one minimizes death in the long-term.
Sure, I'm not asserting that the economic effects will lead to more deaths. I think this is something that needs to be researched and discussed publicly though, because it's really not something we have a good answer to. I imagine that whatever the final outcome of this situation is will directly determine our responses to future threats of disease.
In terms of the first article, it seems to only analyze the effects on longevity in the short-term, whereas I think most of the effects observed as a result of recessions take a few decades to really show up. No idea if that's really the case though.
I agree. The thing about economic deaths is they are silent and nebulous. See the opioid crisis as an example, or crime rates in areas with poverty and economic uncertainty. Or look at illnesses in impoverished regions, such as obesity and diabetes. Look at unemployed people without access to healthcare. Even suicides jumped after 2008. 
When the market makes no sense by keeping non-economic entities that pretend to be companies - you "have to" make no sense along with it. It's the ages old false dichotomy between "growth" and "value". As if growth companies didn't have stable cash flows (they do!).
> if you were on the bubble and the CEO decided to cut into the bone and perhaps you didn't need to be let go, how would you feel?
Your question has the same problem as the modified (blocking the rail with a person) trolly problem. It's a hypothetical so you get to state what's true. In the real world, people have much more limited knowledge.
You get to know whether you're cut or not. You get to know whether another cut was needed or not. You get to know whether the company survived or not.
No one ever gets to know if someone was cut but didn't need to be. Not even in retrospect. Especially if they're "on the bubble".
No real problem that happened this week. Business had precipitous revenue decrease. Could get better, could not. Had to cut employees. Do you cut 35% or 40% of corporate?
Do you cut more just to hedge the economy won't recover? I appreciate the philosophy 101 lesson but your premise is completely not true. If you cut the Sr. Manager of XYZ and hire another one 120 days later...you probably didn't need to cut the one you did.
> If you cut the Sr. Manager of XYZ and hire another one 120 days later...you probably didn't need to cut the one you did.
If you make cuts based on a pessimistic projection and the future turns out to be much rosier than you thought, were you wrong? I don't think so. You just had limited knowledge.
This is compounded by an unusually wide spread between pessimistic and optimistic projections during times like this. Will someone find a cure? Will enough ventilators be made? How soon will people be allowed to go back to work? How effective will self-isolation be?
Today, no one knows the answer to these questions. We'll know much, much more in 4 months.
It's just not reasonable to expect that decisions made today will seem perfect 120 days in the future.
You err on the side of cutting "too much", because a. as the original author suggested, you want to cut once and b. because the downside of cutting "too much" is better than the downside of cutting too little. For everyone.
Running a small company is about keeping that company alive long enough to capitalize on its opportunities for success.
I don't know why you called his company a vanity company, but don't see that you have grounds for that.
If a company cannot sustain itself on revenue alone, and if fundraising is going to be difficult, it is absolutely the right choice (and kindest to everyone in the long run) to lay off those not critical to its survival. That does not mean that the choice is easy.
In 2008 I was employed at a company which did technical support for petrol stations. Initially we didn't feel the hit, but a year later our line manager called a meeting and said that during the previous month not a single new petrol station from the companies we serviced had been opened and therefore the company hadn't had any money from its largest source of revenue, so they had to lay off 80% of the non-permanent staff(which included me).
They went bust after a few years, but it was still a better alternative than closing down immediately.
Have you ever been at a company with multiple rounds of layoffs that affected your division? I have, and Rip the Bandaid Off is absolutely the correct strategy.
With multiple rounds everyone starts to develop neuroses. Productivity tanks, people have conversations about when the next round will be, whether they will be in it, whether essential team member that management doesn't care for will be next, and what sort of a clusterfuck you'll have to deal with when they aren't keeping the wheels on?
Plus by the second or third round, you're probably getting zero severance at all.
After this experience I had a theory that I wanted to be in the first round of layoffs (especially if the company looked like they would do multiples). I got to test that a few years back and it was awesome. None of those people's problems were my problems anymore. No survivor's guilt, no deathmarch. I sat around on my butt for two weeks doing absolutely nothing, and still had severance money left over when my first check cleared at the new job.
If you are the only company doing layoffs, your employees will be fine. If lots of people are doing layoffs, what is more humane? Laying them off before the market is saturated with people, or waiting until the last possible moment when their prospects are at the absolute minimum?
ANd those employees were compensated for the work they did. As long as their final paychecks cleared than the agreement was filled in full. It's filled in full in most every case of employee termination.
Your employer owes you what you earned. You owe your employer what you have agreed to provide in exchange for payment.
Expecting anything above and beyond that...well THAT is "vanity."
I feel fortunate to work at a company that hasn't had any debt since the 80s and keeps a good stockpile of funds. Consequently they didn't have to lay off anyone in 2008 and even the current crisis didn't delay our plans to build an addition to the office.
There’s a lot of survivorship bias to stories like this — and a lot of unobservable opportunity costs. Could the company have grown faster if it had invested its resources to the max and leaned on external funding? Could it have become king ape in a related winner takes it all market?