Every startup hits the wall sometime and has to cut its burn rate in order to survive. No new enterprise is immune. Bad things happen, even to good startups. Then is the time to face reality: to survive you have to reduce the cash burn rate by a large amount. That means you must dismiss a lot of good employees, people you worked very hard to recruit and train, great contributors and innovators. That produces a lot of psychological pain in a lot of people, you included. But it has to be done. So prepare for it.
Serial entrepreneurs march with the same layoff mantra: “When the time comes for the layoff, be bold before it is too late.” They act swiftly, without undue haste. They remain professional through it all. They get it over as soon as possible.
The remaining company will be able to survive after it recovers from the deep surgery. It is your job to stabilize the patient, get it re-energized and back on the road to recovery as quickly as possible. That will ensure productive work returns and the company goes on.
The reason for the layoff is not critical. Recessions happen. Key customers stop ordering. Competitors sue the startup. And a thousand other bad things can trigger the layoff. Your job is not to linger on the reason for the reduction in the burn rate, instead you must focus on getting a swift layoff done well, as quickly as possible.
Doing a Layoff
There is a good way and a poor way to do a layoff in a new enterprise. 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 "save" 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 tell you to 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 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 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 about the layoff at the right time. Plan it in detail.
Execute it with precision. An experienced HR professional can be an invaluable
asset in dark times 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, co-dependency sex, 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 must meet with you, be brutally honest and
available on short notice. You are not Superman, you do not walk on water, nor
are you expected to.
You must be realistic. Your planned layoff may not succeed. You may end up
having to shut down the startup. If you look at your 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
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 be out to get you into deep trouble. That includes sabotage of
software and websites, theft of strategic plans and equipment, and much more.
It 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.
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. That is 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.