“Here we go again! Time to cut the startup burn rate.”
One more voice added to the rising crescendo.
In today’s well-worded blog by Upfront’s Mark Suster, he adds credence to the softening trend in valuations, deals done and IPOs.
Summary from Crunchbase Daily 2016 February 9:
It’s all part of the “resetting” of the venture industry.
According to a survey of more than 150 VCs conducted by Upfront Ventures, 90% said they expected valuations to go down in 2016 and 77% expected the pace of fundraising to slow down this year as well. This isn’t a fire alarm, says Upfront’s Mark Suster, just a warning to founders to reevaluate capital planning and high burn rates.”
HOW SOON WILL IT END?
Keep in mind that Saudi Arabia is in a geopolitical global war with Iran, using oil as the weapon, and is committed to a fight to the death. China is slowing, its leadership getting more and more anxious. So money markets are increasingly nervous, and thus investors sit closer to the exits, including angels and venture capital partners. Your little startup is a cork on that tsunami wave.
BURN RATE CUTTING MEANS MAKING THE TOUGHEST DECISIONS: CUT PEOPLE
Every startup hits the wall sometime and has to cut its burn rate in order to survive. No new enterprise is immune.
This time it’s caused by the recent softening of venture investing noted above. Your startup may be doing fine by your metrics, but it’s not immune to the effects of the weakening trend. So cut you must – or face running your business into the ground, as in dead and buried.
This is not about finding cheaper rented space. Or ending free food. Or flying less.
It is about cutting the source of 80% of your spending: people. Yes, that means who are you going to layoff? Painful – but terminating the business is much worse.
There is a good way and a poor way to do a startup layoff.
HERE ARE SOME TIPS FROM VETERANS OF THE STARTUP BATTLEFIELD.
- You never cut headcount too early. You will always be late. Entrepreneurs are genetically overly optimistic. It is in the genes. They believe they will figure out a way to avoid the painful cuts of employees. So they are always late for the layoff.
- You never cut headcount too deeply. You will always cut not deeply enough. The cuts will seem to produce a company impossible to manage, unable to compete. So you think you have "saved the best of the best” and you end up with more than you should have.
- You will react to pressure from your board. Your investors will especially be quicker than you to demand that you get going with the cuts. They have seen this before. One reason they are on the board is to give you perspective and wisdom. Listen to them, even if you don't want to.
- You will end up with a different company to manage. It will seem strange to you. The surviving set of employees will behave differently, will be able to do less and will respond to you in different ways. Their psychology will be changed because of the layoff. It may be good ("At last we got rid of the deadwood!"). Or it may be bad ("We are so lean I can't see us surviving for much longer.").
- You will need twice as many months to turn the corner. Your expectations for a return to the good old days will be too optimistic. So use The Rule of Two: double the number of months you expect to need to get to the upward turning point. Plan on that and you'll not be as likely to be disappointed.
- Your process is as important as the act. You must proceed to tell all the stakeholders and do so in a concerted, planned process that is very professionally managed. How you treat those laid off will be as important as how you treat those that are not. You cannot avoid the pain but you can reduce it. Everyone needs to know everything about the layoff at the right time. Plan it quietly, quickly, in detail. Execute it with precision. An experienced HR professional (lots of battle scars) can be an invaluable asset in the dark days of a layoff.
- Your personal support group is important for success. It is lonely at the top. You are not excluded from the human race, believe it or not. You will feel depressed, disappointed and defeated during the process. To avoid dangerous compensation behavior (alcohol, drugs, sex rampages, co-dependency screaming sessions, rage outbursts at people you love, or other acts of foolishness), gather family and friends around you. It is a good time to check in with your religious leader. Tell all of them to assist you during the layoff process. They should meet with you, be brutally honest and available on short notice. You are not Superman or Wonder Woman, you do not walk on water, nor are you expected to.
- Your character will emerge during the process. The pain of a layoff will show you who you really are. The real you will show up, loud and clear. That will be who you are deep down inside. Your core values and beliefs will be what you reach for while you do the layoff. What you see may surprise you. Or even scare you. That is one reason for gathering your support group around you while you go through the layoff.
- Beware of dangerous people. The true character of employees will be triggered by the layoff. Some people go home, get guns and return to shoot CEOs. Others less violent will set out to get you into deep trouble. That includes sabotage of software and websites, theft of strategic plans and equipment, and much more. It has and can happen in any company. That is why you must wisely plan the security aspects of your layoff.
- Talk to CEOs who have done layoffs before. They are the best sources of the how-to part of this painful process. Listen, digest, plan and act, using their tips to do a better layoff. Their experiences are priceless. They got the grey hair in the school of hard knocks of doing real startups.
- You must be realistic. Your planned layoff may not succeed. You may end up having to shut down your startup. If you look at your burn rate modified company plan and think it will not work, then it may be time to skip the layoff. Just shut the business down, now. Avoid the pain of six more months of agony and the inevitable funeral.
MORE: I have additional burn rate cut tips for you at https://goo.gl/2yOkO6
BOTTOM LINE: All startups face sudden moments of rude confrontation that signal that a layoff will be needed, ASAP. It never comes at a good time. It is always very painful to a lot of people, including the CEO and core team of a new enterprise. It is deeply psychological, testing your character to its core. It can determine the life or death of your startup (and your position as its leader). Yes, your objective is to be so successful at planning and executing that plan that you'll never have to arrive at a moment of layoff. But you are not going to get there. Psychologists call that magical thinking. So get ready. Get the people you need to assist you lined up, ready to act. When you can do a great layoff, you'll have added a powerful element to your personal unfair competitive advantage.
I wish you The Best on your Adventure!
“Tips and Tools for Entrepreneurs in a Hurry”