Tech Company Layoffs

There’s been quite a bit of news over the last several weeks of tech companies freezing hiring and laying off employees. Perhaps most notably, Meta (formerly Facebook) recently laid off 11,000 employees or 13% of its workforce. I thought I'd write a post about what tech companies are thinking about and the factors that are contributing to these unfortunate announcements. First, some history:

Until about a year ago, the stock market had been on a bull run for about 13 years. There are several reasons for this, but the primary reason was that, during this time, we had zero or near-zero interest rates. When interest rates are near zero, companies can borrow money almost for free, allowing them to invest heavily and grow, grow, grow. In addition, when interest rates are so low, money flows out of fixed-income investments and into riskier equity investments (the stock market). More money in equities means higher stock prices for public companies. Public company stock prices are a proxy for private company valuations, so private companies have experienced the same dynamics. This enabled companies to raise enormous amounts of money with little dilution for founders and shareholders. Due to classic supply and demand forces, more money in equities means that the same company with the same financial profile could be valued at 2 or 5, or 10 times what it would be worth in a less bullish market.

It was a great ride until COVID hit, and the economy stalled because people couldn't leave their homes and go to work and buy the goods and services they had been buying in the past. To get us through the crisis, the federal government rightly provided a massive economic stimulus to businesses and consumers by pushing more than $6 trillion into the economy. Again, more money in the system means higher prices for everything (including stocks). Due to COVID, we also saw major global supply chain issues and price spikes across nearly every category (again, the effects of supply and demand; reduced supply of products drives higher prices). Thankfully, the economy quickly recovered and Americans had surpluses of cash that they were anxious to go out and spend. And they did. As a result, we're now seeing historical levels of inflation. The inflation rate for the period ending in September was 8.2%; the average is closer to 3%.

This level of inflation is very dangerous. If prices increase faster than wages, it can literally topple the economy. And there have been lots of examples of this happening in the past. Luckily, the federal government can contract the money supply to slow inflation (less money in the system leads to lower prices). This has the effect of raising interest rates. And that's exactly what has happened; the federal funds rate sits at around 4%, the highest since 2008.

As a result, money has poured out of equities, particularly tech equities. The broader S&P 500 index is down about 15%, and the tech-focused NASDAQ is down about 30%. Tech companies get hit much harder in these cycles because they're investing in future growth and often carry a lot of debt. Because the profits from these investments won't be realized until further out in the future, increased interest rates discount the values of these future cash flows by an excessive amount (more on this soon).

An additional challenge is that as the Federal Reserve contracts the money supply and interest rates rise, it's not very predictable how quickly that will temper price inflation, so there's no way to know how long this drop in the markets and company valuations will persist. And there are reasons to believe it could get worse before it gets better. 

For companies trying to navigate all of these changing conditions, their worlds have become much more difficult. Valuations are way down. As recently as 10 days ago, Facebook’s stock price hit $88, down from a peak of $378. Stock options granted to Facebook employees over the last 6 or 7 years are likely worthless.

Further, the cost of capital (both debt and equity) for companies has significantly increased. This hits technology companies, which, as I mentioned above, typically have higher levels of debt because they're investing in new growth, particularly hard. The cost of running these businesses becomes much more expensive because the cost of debt increases (increased interest expense). In addition, some of these debt covenants have requirements around growth and profitability that companies need to meet. 

Moreover, and this is probably the most important part of what's going on that should be well understood, is that because tech companies are investing heavily in new growth, the profits from those investments won't be realized for several periods. And higher interest rates hit growth-oriented companies very hard because of the discount rate of future cash flows (more on that here). This is a very important economic concept that many in the tech ecosystem don't understand well enough. Said simply, a company is valued on its ability to generate future cash flows. And increased interest rates lead to a discount in the current value of these future cash flows far more than for companies that are profitable now. When interest rates are zero, there's no discount applied to future cash flows, so the market seeks high-growth companies that are making big, bold bets. When interest rates rise, investors look for companies that have profits now. Again, this is simply because of the discount applied to future cash flows.

Finally, and more broadly, businesses are seeing what's happening and are concerned that jobs will be lost, spending will slow, demand for their products will decrease, and a recession (two consecutive quarters of negative GDP growth) might be on the horizon and bookings and revenue may decrease.

That's the situation tech companies find themselves in today. So how are they responding?

Well, it's important to remember that a company's primary purpose is to maximize shareholder value (for external investors and employees holding stock options). Management has a legal duty to its shareholders to operate in a way that maximizes the value of the company, regardless of the changing markets and the lack of predictability around when things will get better or worse. So in a market where near-term profits and cash flows are very highly valued, companies must pare back longer-term growth investments and find ways to cut costs to realize profits more quickly. And, because, typically, the vast majority of expenses of a tech company come from human capital (employees), the only material way to do this is to slow hiring or decrease headcount.

And this is exactly why we're seeing all of the news reports of tech companies freezing hiring and laying off employees.

Of course, some will criticize these companies for hiring too fast and overextending themselves, and voluntarily getting themselves into this situation by investing too heavily too fast. In many cases, this criticism is fair. But it's worth noting that, while cost reduction has rapidly become very important, in a bull market, growth is inversely and equally important. Facebook, as an example, is taking a lot of heat for overhiring engineers, but should they? I’m no expert on Facebook, but it’s an interesting thought exercise to think through for any company. Again, the job of a company is to maximize shareholder value. And when capital is cheap or free, the companies that invest heavily in growth will receive the highest valuations (again, refer back to the discount rate applied to future cash flows). At scale, had Facebook and the other tech giants chose not to make those hires, those individuals would've been unemployed during that period or would've received lower wages from other companies during that period, possibly displacing less talented engineers. If a company has viable ideas and areas to grow, and capital to invest in that growth is freely available, it must pursue that growth. It must maximize shareholder value. Companies with high growth potential have to play the game on the field. They have to pursue growth if they believe it's there. This is an unavoidable cycle that innovative companies are subject to. And individuals that work in the tech ecosystem will inevitably be the beneficiaries – and the victims – of these realities. Other industries experience far less dramatic highs and lows.

Of course, it should be noted that these highs and lows seriously impact people's lives. And I've been glad to see many companies (though not all) executing these cost reductions with humility, empathy, and generous severance packages.

With all of this said, inevitably, at some point, inflation will slow, interest rates will decrease, companies will invest in growth, companies will start hiring again, we'll be back in a bull market, and everything will seem great. In the meantime, it's important that all stakeholders that have chosen to work in and around tech understand and plan accordingly around the macroeconomic cycles that have a disproportionate effect on this industry.

Investor Context & Incentives

The best managers prioritize giving their teams as much context as possible. When employees lack context, it leads to an enormous amount of unnecessary friction and uncertainty. It’s crucial for managers to give context around the work they’re asking employees to do, the decisions they’re making, and the priorities they’re driving. At the same time, employees should play a role here as well. If they’re not getting the context they need from their manager, they should ask. Employees should empathize and push hard to get in the head of their manager and understand their manager’s incentives and the context they’re operating in. It’s a partnership.

While this is fairly well understood, often, I find that managers don’t understand the context and incentives of their boss’s boss or even their boss’s boss’s boss (the company’s investors). I’ve found that deeply understanding how investors think is an essential part of being an effective operator. It’s even helpful to understand the content and incentives of a company’s investors’ bosses (the investors’ limited partners).

Here are four books that have helped me get inside the heads of the individuals that invest in the companies I’ve worked with, both venture-backed and private equity-backed. Understanding the history of these industries, their investment strategies, and how investors are measured and managed has made me a much more effective operator and leader.

Venture Capital

The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby

Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups by David Rose

Private Equity

The Private Equity Playbook: Management’s Guide to Working with Private Equity by Adam Coffey

Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria

Refusing To Fail

I heard Phil Mickelson, the legendary golfer, tell a great story the other day.

He was asked what makes the best golfers the best golfers in the world. He told a story about how a long time ago, he really struggled with short putts. One day his coach recommended that he try to make 100 three-foot putts in a row. If he missed one, he'd have to start all over again. And he should keep practicing this until he can reliably make 100 in a row. He claims that one time he made it all the way to 99, missed the 100th, and started over. 

Years later, he was mentoring an up-and-coming amateur golfer who was struggling with short putts, and he gave that golfer the same advice. Several months later, he checked in on how the golfer was doing with his putting, and the golfer said, "yea, that was really hard, I got to where I could make about 50 in a row, and I gave up.”

This golfer never made it in the PGA.

This is a great analogy when thinking about startup investing. Often, in the early days, you're really investing less in the idea or the product or the market; you're really investing in the founder themselves and their willingness to persevere and navigate through the idea maze and do what, in some cases, seems impossible. Some people work on some projects where for whatever reason, they will absolutely refuse to fail. Elon Musk is a great example. Both SpaceX and Tesla should've failed multiple times. But he persevered and forced it to happen through sheer will. Of course, he's incredibly smart and talented, but that wouldn't have been nearly enough. This quality doesn't exist in everyone, and even for those that do, it doesn't exist for every project at every time in their lives, given changing life circumstances and priorities.

This golf analogy is a good one to consider when you're investing at an early stage where you don't have much to go on other than the talents, skills, and dedication of the founder and founding team.

Learning How To Learn

Perhaps the most valuable skill one can have today is the ability to learn new things. The world is changing so fast. Static, top-down learning and development programs are quickly becoming outdated and irrelevant. 

The good news is that there is so much information available for free. Any self-motivated individual can learn almost anything on their own — assuming they know how to learn in a self-directed way.

In my mind, there are three steps to being proficient at self-directed learning:

1/ Identify what you don't know that's important to learn.

2/ Find resources to learn about the things you don't know.

3/ Do the work to learn about the things you don't know. 

Identify what you don't know. This is the hardest part. Because often you don’t know what you don’t know. This is where it's helpful to have mentors that can help identify your blind spots. It's also helpful to have a network of other people who are doing your job or the job you want to do. 

For an aspiring sales leader, here’s a list of things they should be learning as they climb the ladder from individual contributor to a sales manager to an executive.

Individual Contributor:

Sales tactics (discovery, outreach, access, presenting, proposals, objection handling, creating urgency, closing, etc.).

Understanding your buyer and your buyer's industry (business model, competitors, motivations, priorities, org chart, decision framework, regulatory, etc.).

Sales Manager:

Management (hiring, firing, employee engagement, giving feedback, setting priorities, territory management, performance management, etc.).

Sales strategy (forecasting, OKR management, customer segmentation, prioritization, leadership reporting, etc.).

Executive:

Management against industry metrics (e.g. in SaaS - CAC/LTV, Rule of 40, Payback period, growth rates, gross margins, etc.). 

Company strategy. Setting mission and vision. High-level qualitative goals and financial goals. 

Thinking like an investor. Understanding how financial metrics, storytelling, and a long-term plan connects to a company’s valuation. Understanding the mindset and motivation of investors that would invest in your company. 

Find resources. This is relatively easy these days. Use Twitter to follow experts in your areas of interest. Setup a Feedly account to get a feed of blog posts related to the interest area. Setup your podcast feed to receive daily podcasts on the topic. Read the best books on the topic. Join communities (such as Pavillion or SaaStr) to interact with peers. Leverage your investor networks (First Round Capital has a great one). Find a coach. Find a mentor.

Do the work. Once you've identified the learning area, start to obsess about it and immerses yourself in content. You'll quickly identify areas that you didn't know you didn't know. Learn about those things. Create habits that force you to keep learning. Listen to one podcast per day. Read 50 pages per day. Set a goal of having coffee with at least one mentor or person that does the job you want to do each month. Repeat. 

Discipline In Company Buildling

I love this Tweet from Dan Hockenmaier.

It's very common for early-stage startups to over-title people to get them in the door. Often they don't have the clout or the cash to get great people, so they use a senior title as a way of convincing someone they like to join the team. This is a mistake and causes all kinds of issues down the road. When the company is finally able to recruit people that are legitimately at the Director or VP level, those people are going to look at their peers and demand a higher title.

The company will then have a similar problem at the VP or C level. It will result in a disjointed and confusing org chart that will need to be blown up. And if the company wants to hire above the person they over-titled, they may have to let that person go or give them a demotion (which will likely cause them to leave). The hard work will have to happen at some point. Over-titling people in the early days just kicks the can down the road. In his book, the High Growth Handbook, Elad Gil points out that, in the early days, Facebook and Google gave employees the lowest titles possible (VPs that came over from Yahoo! or eBay came in at the Manager or Director level).

With all of that said, the much more significant implication of Dan's Tweet is less about a decision around what title to give someone, and more broadly around the topic of discipline in building a startup. Startups are so hard to build and there will be all kinds of temptations to cut corners, delay hard decisions, and take the easy way out. Some examples:

• Give away free pilots.

• Build one-off features to close a deal.

• Agree to overly flexible payment terms.

• Hire an experienced person even if they're not the right fit with the team.

• Delay terminating an employee that is damaging culture.

• Partner with a well-known brand even though it doesn't align with the company strategy.

• Raise more capital than is needed.

• Pivot product roadmap based on a few customer requests.

I could add 100 more things to this list. The startups that consistently resist these temptations are the companies that win. Eventually, a lack of discipline will catch up to the startup and will make success even harder than it should be.

When joining a startup, look for signals of good discipline. You might not get the title you want, but that’s a small price to pay to get a seat on a rocket ship.

Irreplaceable vs. Replaceable

Here's the story of a company and a founder that has been told many times.

A company has become huge. They've had overwhelming success. But they've become slow and bureaucratic, and innovation has slowed. It's become a boring place to work.

A star employee, let's call her Jane, sees a clear opportunity to improve the company's situation. She has some great ideas on how to breathe fresh growth into the company. Jane's ideas are ignored. Nobody listens to her.

But Jane can't get her ideas out of her head. She needs to pursue her idea. So she leaves the company, raises some money, and builds a product and a company around her idea.

In order to succeed, Jane needs to build a great team. Because there are so many challenges in launching a new company that will beat the incumbents, she needs a team of superstars. She needs to hire people that are amazing. People that are able to run through walls. People that are irreplaceable.

So Jane builds a team full of stars.

And it works. The team of stars is able to take market share and grow rapidly. They have lots of success. They scale and have hundreds of employees. Soon they have thousands of employees.

Now, Jane's burden isn't to disrupt a business or industry; her burden is to protect what she's built. At this point, Jane needs to hire people that are replaceable. If someone is irreplaceable, that's a problem. She needs to build systems and processes and support around her employees so that no single employee is critical to the company's success.

Jane's company has gone from requiring people that are irreplaceable to requiring people that are replaceable. And the cycle continues…

As startups grow, they shift from breaking new ground to protecting their ground. This shift happens gradually and impacts some functions and roles before others. It's very difficult for companies to make this shift. It requires adaptable people, different people, and lots of process building. And you obviously will always need lynchpin employees in some roles.

The irreplaceable vs. replaceable concept is a simple framework for how to think about company building in the later stages of growth.

Put A Stake In The Ground

When you start a new venture — a company, a team, a job, a product, a project — setting goals around its success can be stressful. You don't know how fast things will move and how successful you'll be.

Further, lots of people are afraid of being held accountable, much less being held accountable for something that isn't yet understood.

So there's a temptation to just get started without setting goals and see how things go.

For example, I've seen many startups not set sales goals in the early days because they feel like they don't have enough information.

This is a bad idea.

Setting a goal gets you and your team rallied around a target. If you meet or exceed the target, the team will feel great, and you can celebrate. If you miss, you can surface learnings and insights relative to the goal you set.

If you're hitting or exceeding your goals, surfacing learnings is less important. If you're missing, learning is crucial. A learning that isn't connected to a goal is much less powerful and much less interesting than one that is. This will also create the habit of being held accountable and reporting on failure as much as you report on success.

Put a stake in the ground. Set a goal. If you hit it, great. If you miss it, you'll feel a great deal of pressure to surface high-quality learnings that will get you closer next time.

Best Books For New Sales Leaders

The other day a friend of mine asked me what books an individual contributor that just took a sales management job should read. Here's what I told him:

For tactical management, I’d have to recommend the Effective Executive by Peter Drucker. I try to read it every few years.

For higher-level leadership concepts, I’d recommend Leadership and the Art of Self Deception: Getting Out of the Box by the Arbinger Institute. 

For culture, read What You Do Is Who You Are: How to Create Your Business Culture by Ben Horowitz.

And for tactical sales process and leadership, definitely read The Sales Acceleration Formula: Using Data, Technology, and Inbound Selling to go from $0 to $100 Million by Mark Roberge. 

How To Structure A Commercial Organization

There are several different ways to structure a commercial organization. Markets, products, segments, etc. The model I prefer is to structure the teams around metrics. This does a few things:

1/ It ensures that the organization has a metrics mindset. Sometimes people forget what metric their work moves. Building the org around metrics makes this nearly impossible.

2/ It ensures everyone knows they’re contributing. There’s nothing worse than coming to work each day and doing a bunch of work that doesn’t actually contribute to a business objective.

3/ It helps with prioritization. Teams should prioritize their work based on the impact it’ll have on the metrics. Focus on low effort/high return work, and avoid high effort/low return work. It’s amazing how few people have this mindset.

I separate a commercial org into three buckets. If you’re not directly contributing to one of these three buckets or supporting someone that does then you’re on the wrong team. Commercial orgs only do three things:

1/ They sell stuff.
2/ They implement stuff.
3/ They retain stuff.

Everyone should be impacting at least one of those things. Then assign a set of metrics with targets against each. Here are some examples:

1/ Selling stuff (bookings, upsells, expansions, new logos).
2/ Implementing stuff (speed to go-live, quality of implementation, cost of implementation).
3/ Retaining stuff (retention, renewals, net promoter score, user activity).

I’ve found that structuring the team around these three activities and some set of metrics ensures that everyone has clarity on their role, their value, and how they’re impacting the business in a positive way.

The Job Of A Sales Leader

A sales leader’s job isn’t to hit the number.

A sales leader’s job is to hit the number while simultaneously ensuring that those prospects that choose not to buy have a positive experience and that the sales team doesn’t overcommit or redirect product and engineering resources.

The best way to do this at scale is to hire a sales leader that shares this perspective and knows how to build the right kind of sales culture from the start. It’s extremely difficult to change a sales culture once counterproductive norms have been established.

*adapted from this podcast with David Sacks.

First Principles

If you believe the world is going to end tomorrow, and your significant other doesn’t, you’re likely going to have very different opinions about what to have for dinner tonight.

You'll be inclined to go to an expensive restaurant and live it up. Maybe a great steak with some expensive wine. Why not? It's all going to end tomorrow. Your partner, on the other hand, may just want a quiet, normal night at home. Maybe order a pizza or have leftovers or make something with whatever is in the refrigerator. You may end up having a big argument about what to have for dinner tonight.

But that's not the thing you should be arguing about. You should be arguing about the first principle: whether or not the world is going to end!

This happens all the time inside of companies. Colleagues argue about the small, day-to-day issues on the ground and forget about first principles. This is perfectly understandable. When you're moving fast, you're going to run into one another on micro issues that you're not aligned on. The key is to recognize when this becomes a trend, and then pull your head up, get the right people on a call, and get aligned on the high-level first principle that’s causing the disagreement.

Here are some examples of first principles inside of a company:

We err on the side of being transparent with employees.

We should pay employees above market.

Profit margins will suffer for a while while we invest in new products.

Diversity, equality, and inclusion inside of our company is a high priority.

Employees should be able to make their own decisions on how to spend company dollars.

Often, getting alignment on first principles is easy. The hard part is pulling up and out of the day to day noise and recognizing and calling out the misalignment. It's important to create forums — meetings, Slack channels, or some kind of document — that allows people to easily surface the misalignment. Companies that do this well can avoid an enormous amount of friction and will move much faster and smoother as a result.

Management Lessons From Keith Rabois

Keith Rabois is a very successful operator and tech investor. A couple of weekends ago, I listened to this talk he gave at the First Round Summit back in 2013. He shared some great insights on management and leadership in here, so I jotted down some notes on the things that resonated with me the most:

1/ Optimize around hiring people that are "relentlessly resourceful". 

2/ When managing someone, ask yourself if you're "writing" or "editing" their work? If you're writing for them, you need to fix it or replace them. For a sales leader, are you closing their deals for them, or are you coaching and tweaking little things?

3/ Everything can't be perfect. One of the hardest things President Eisenhower found when he became president was that he had to sign letters that were below his writing standards. There's too much to do. Get comfortable with 80% perfect for most things. Seek out the things that are important and get those right.

4/ A huge piece of hiring someone that can scale is finding someone who knows what they know and what they don't know. Knowing the difference is so important. People that know what they don't know will avoid big mistakes. 

5/ Be transparent. Seek to be so transparent that everyone on your team would make the same decision that you're making because they're operating under the same context.

6/ Politics in a company is driven by different people having different information. Avoid widespread politics by giving everyone the same information.

7/ Hire thought diverse people but pay attention to important first principles (particularly when hiring leaders). e.g. if you want to build a closed software platform, hire people that support that approach. Otherwise, you'll spin and keep coming back to first principles. 

8/ Hire and promote people that see things you don't see. This is invaluable. And create an environment where they can freely tell you what you're missing.