The culture problem in Tech that causes layoffs
Why small to big tech startups specifically in SaaS are hit the hardest now
How can it be that product-led growth is the most cost-efficient distribution model and yet those companies are laying off people left and right? The story doesn’t add up.
The problem we are dealing with in this industry is a culture problem that leads to a “Phone call”.
The structure of most SaaS / PLG businesses is that ~70% or more of all cost is staff related. Since product-led growth businesses have almost no cost to serve their products they can “afford” to give them away for free in trials to drive acquisition.
A common number that you can deduct simply from looking at employee numbers in tech / SaaS is their revenue. Multiply the number of employees by $200’000 and you arrive roughly at the ARR of that company. (This goes for Sales-Led and PLG)
While that actual number might fluctuate, I found this number to be in the correct ballpark.
This is a very useful number for many reasons in consulting and company evaluation when you have absolutely nothing else to go on. I use it often to structure my business cases, but…
…why is it relevant for layoffs in tech?
The problem is that tech SaaS businesses are comparatively easy to evaluate on their performance due to their simple cost structure. And this leads to you as a leader getting a phone call at some point:
The “Phone Call”
Imagine you are a CEO of a growing plg startup. You raised capital, everything is going really well. Everyone is happy from the board to the employees.
At some point one of your investors or the board gives you a call:
“Hey Leah, I just sat down and ate my avocado toast and couldn’t help but notice in your quarterly report that you make over $500’000 per employee. That’s amazing!”
“Oh why, thank you!”
“I mean that’s all great but why are you not investing this capital into further growth? We have to grow faster.”
This right here is the cultural problem we have. We’re not “happy” with a good reserve of 400k / employee. We keep investing in the business until that ratio comes down. Because we could miss out. We’re greedy.
It’s not (just) the CEOs. It’s the board. It’s our Industry treating their employees as resources. It’s in the literal sense of the word “Human Resources” because more often than not in tech the word “Investing” can only mean: Hire more people.
If we found a way to cut people’s wages in half and optimize our revenue we would still start to hire more afterward. Because we are so so greedy for growth. It’s never enough. We need to chase that unicorn at any cost.
Make no mistake there are Leadership teams out there that were more conservative before the correction. But you can bet on it that some CEOs were also laid off when they refused to push more aggressively for growth. You don’t hear about those. You read about them in statements that go like this:
“Due to internal restructuring and refocussing of our company strategy we decided to part ways with ‘x’ we thank her for all her efforts”
We can be angry and lash out on social media all we want but this is the structural problem we have. And I don’t see it changing anytime soon. In the next upturn of the market, we start to chase growth again instead of ROIC (Return on invested Capital).
The “Solution”
I don’t know what the exact solution could be but I know that it has to deal in some way with this number (or runway). We have to stop celebrating companies that take aggressive, risky approaches and then celebrate their accidental successes. We need to find a way to reward sensible risk profiles.
We should incentivize moonshots and innovation but not at the cost of human capital. And this is ultimately in the hands of investors and VCs.
The big question will be whether we turn into another “Wall Street” in 2008 (or did we already?). Are we beyond self-regulation or does it need systemic changes?
Why is every layoff between 10-15%?
This is a terrific piece to explain the size of the layoffs by Elad Gil which gives additional context and a more complex insight.
Good additional reading on the topic
If you are completely new to the topic of how company valuation works I recommend “Valuation” by McKinsey.
You are hitting the ball out of the park, Leah.