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Why Are Startups Running at a Level Where They Can Lay Off 1/3?

Posted by Bob Warfield on October 18, 2008

Hard times are on us, and we’re all watching with some concern how this impacts the High Tech Startup World.  It’s terrible to see the grim heart to hearts investors are having with their portfolio companies, and worse still to read the constant announcements where another startup is laying off a bunch of people.

I was chatting with someone recently about exactly how they were determining who should go.  It should be a terribly difficult thing to decide for a startup in my view.  After all, startups should be lean and mean, right? 

If you’ve ever been at a large company that had to layoff, you’ll be familiar with the notion that you can always cut the bottom 10% and little harm wil be done.  One hears this refrain constantly in those situations, and its accurate.  But I have a hard time understanding why it should be accurate for a startup.  When we’re talking about laying off 1/3 rather than 10%, it becomes even more outlandish to contemplate.

Startups need to have laser like focus to succeed.  They need to find leveraged ways of doing things.  It’s useful to outsource anything outside the startup’s distinctive area of competence.  These days Cloud Computing makes it possible not to even have to own a data center.  We know that smaller more agile development teams work better.

How then are we still creating startups that can afford to shed 1/3 of their staff and still survive? 

It would seem to me that the goal for any startup should be creating an organization that wouldn’t survive if 1/3 of the people had to go.  After all, startups should be lean and mean.  They should be focused on being nimble and doing less with more. 

How to go about doing that?  Here are some thoughts:

–  Hire fewer, more senior people.

–  Hire doers, not managers.  Every person in a startup should be capable of producing some form of content–writing code or at least specs, helping test the software, closing deals, writing marketing content, and so on.  It’s a warning sign if you have someone in the organization who has to look to others either inside or outside the company for every single deliverable.

–  Outsource everything that isn’t your distinctive competence and that you can find competent outsourcers to handle.

–  Analyze every new hire by asking whether they are better than the median person in their group.  If so, you’re raising your standards, and that’s a good thing.  If not, why are you making that hire?

–  Look for people comfortable wearing more than one hat.  It makes load balancing much easier and it improves organizational harmony by getting more people working together outside their silos.

–  You should almost never hire capacity in anticipation of demand.  Fill all the basic functions well with good people and then hang on to the tiger by the tail.

–  Do not measure people by how quickly they hire.  Measure by how well they hire.

These rules apply even in good times, but most of all in bad times.

Related Articles

Mike Arrington says, “Some CEOs see this as a once-in-a-startup opportunity to get rid of the deadwood in the company.”  Wow.  I couldn’t ask for a better reaffirmation of what I’m saying above.  Why did you hire that deadwood, Mr Startup CEO?  Worse, why did you let it stack up so high?  Granted, some startup CEO’s are very inexperienced, but hiring someone is a very serious matter.  There are few decisions you’ll make that matter more.

Seth Godin weighs in very much in the same camp I am with “too small to fail.”  He points out that even when a company is relatively big, there is tremendous advantage in thinking small.  Read his great post for more insights.

4 Responses to “Why Are Startups Running at a Level Where They Can Lay Off 1/3?”

  1. […] stay on a general level for now. Update (10/18): Fellow Enterprise Irregular Bob Warfield asks: Why Are Startups Running at a Level Where They Can Lay Off 1/3?  I think it’s clear that only the VC-funded ones (some?  more?) are.Another […]

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