How to counter the nasty side-effects of rapid burn reduction
When high-growth startups throttle back
Thousands of startups are about to embark on cost-cutting exercises to increase their runway. VCs like us tend to encourage aggressive action because in a crisis it’s risky to under-correct. But we should take care to describe the side-effects too.
I was VP EMEA at Twitter from 2012–16, a period in which Twitter grew explosively, had a successful IPO, then rapidly decelerated and flat-lined. The shuddering loss of momentum was felt by every employee and it tipped the company into a downward spiral that was hard to reverse.
Dynamic equilibrium
Let’s explore the ubiquitous runway metaphor for a moment: it casts the company as a fixed wing aircraft, burning fuel (capital) to produce thrust (revenue). This flying machine accepts inputs without emotion and produces outputs. Money in, money out. Reduce burn, increase runway. A simple system.
But there’s a pesky concept in aerodynamics called dynamic equilibrium: the balance between lift, thrust, weight and drag. Airplanes are designed for flight — they must move forward to stay in the air. They can’t hover.
Startups are similar. They are exquisitely designed to do one thing well: grow fast. Large markets, novel technology, venture capital, and equity-based talent acquisition work together to promote fast growth or fast failure. Startups can’t hover.
When burn drops, so does growth. Fewer marketers are hired to stimulate demand, fewer salespeople to close deals, and fewer engineers to build new products. If burn vs growth were a linear trade-off, the CEO’s choice would be straightforward: simply pick a target runway and reduce burn accordingly. But companies aren’t black boxes that convert inputs into outputs without emotion — they consist of humans, who behave differently in low- and high-growth environments.
Abruptly lower growth has nasty side-effects. When you ask employees in good times why they choose to stay at a company, they often reply with some combination of Career Development, Colleagues, Compensation, and Leadership. But these four selling points assume fast growth. When growth sharply slowed at Twitter, the company’s human capital contracted with it.
Career Development
The biggest driver of career development is not your manager or the company’s brand or even personal performance — it’s the company’s growth-rate. Fast growth creates opportunities all around and when it slows the easy options for career development vanish. Suddenly, high personal performance no longer guarantees promotion because there is no role of sufficient scope to be promoted into. Turf wars become more common. The chance to mentor new recruits or work on new products disappears. The job suddenly becomes…the core job. And, funnily enough, most startup employees don’t join companies for the core job — they want more.
In employee satisfaction surveys, the question that is most predictive of future staff attrition is “does your manager support your development?” As growth slows, it’s crucial to become more structured about this topic. Once a quarter, managers should set aside time for an explicit career conversation with each employee. It is best done in person and should never be linked in time or tone to a performance or compensation discussion. Although career chats should always be forward-looking, in times of turbulence shorten the window to “the coming year” rather than “the next 5 years”. Ask “what do you want to get out of the role and how can I help you?” Don’t talk much, just listen and take notes. It might be easier to satisfy the needs than you imagine.
Colleagues
There is nothing better than winning as a team — no individual achievement tops the feeling. As a team bonds and expands, it exerts a gravitational pull on each member. Layoffs change everything, for those who leave (of course) and those who remain. In 2015, I stood in front of a packed All Hands at Twitter’s EMEA HQ to announce the company’s first-ever round of layoffs. There were audible gasps in the room as I revealed the grim facts — 8 per cent of the company would lose their jobs that day. And an even greater challenge came afterwards: what started as one targeted round of layoffs subsequently triggered waves of uncontrolled staff attrition, which exceeded 30 per cent in the following year.
Other firms have written good articles (e.g. here) on how to implement layoffs. One thing I’d add: focus intently on the employees who remain. Consider grouping employees using a 2-by-2 matrix with Performers and Influencers on the axes. Employees in the top-right-hand quadrant are both high performers and culturally influential in the company. They are critical to the company’s survival because they have a disproportionate signalling effect on others. Once influential high performers begin to resign — as they did at Twitter in 2016 — an unrecoverable tailspin begins. Do everything in your power to ensure these people stay through the downturn.
Compensation
As private and public market valuations continue to converge in the coming months, startup employees will find that their equity is worth less than they recently imagined. As growth slows, the path back to a higher valuation seems longer and harder. So cash comp becomes more important, just when the company needs to preserve its cash.
It is tempting to throw scarce equity and cash at top employees, but the greatest point of leverage is to make the company’s plan ambitious and credible. If employees believe the company will deliver over the next year, they will believe that their equity can recover. Executing flawlessly on that plan — and regularly communicating progress against it — will create more equity value for more people than robbing Peter to pay Paul.
Leadership
Startups hire executives and managers that are attracted to, and thrive in, high growth. When growth slows, some of them lose their superpowers. It’s much easier to inspire in the good times than to motivate people to stay the course in the bad.
Leadership doesn’t happen on stage, it happens in small groups — even more so in a world of remote work. While CEOs set the tone, they should recognize that leadership can’t only happen at All Hands meetings. It must be distributed. In particular, two layers of management are critical:
- C-level executive team (obviously). In a functional org, if even one C-level exec goes wobbly or leaves, uncertainty will cascade throughout the company. Identify which C-level execs are capable of leading through the tough times and shore them up.
- First line of people managers (less obviously). Sitting towards the bottom of the org pyramid, they have both the most direct reports and the least management experience. They are a point of leverage that most CEOs and VPs completely ignore. Ensure they have the information and coaching to lead through the dip.
The company’s truly great leaders are revealed during times of distress and they may come from surprising places.
A more productive role for VCs
Through the good and bad years at Twitter, a consistently motivating voice was Peter Fenton’s. Every year or so, the Benchmark board director would show up at an All Hands and outline the bull case — why he invested in Twitter and how it would one day fulfil its giant potential. Why, despite media reports of Twitter’s terminal decline, we should still believe. It was a disciplined and powerful role for an investor to play.
It’s all too easy for VCs to call for rapid burn reduction. It’s much harder for us to foresee the side effects felt deep within the company, far from the board’s eye-line. Our role is not to direct, it is to support CEOs as they fly through the storm. CEOs know better than anyone that lift, thrust, weight and drag can’t be out of balance for long. After all, reducing airspeed to avoid a mountain is of no use if the airplane stalls and falls from the sky.
Stephen is a partner at Frontline, a VC firm that invests in software companies in the US and Europe.
