There is never a straight line to success – startup teams expand and contract all the time as they learn what they need to become. Being in a startup means trying things that may not work. In fact, most things we try in startups don’t work the first time and many variations of an idea are attempted before the winning solution is discovered. Sometimes a solution cannot be found.
Steve Blank defines a startup as “a temporary organisation designed to search for a repeatable and scalable business model”.
Teams and the people within them are one of the most important ingredients in a startup recipe and they change as much as anything else. If they don’t, it is likely that a company will fail or be a weaker version of its full potential.
Walking into the office (if there is one) of any startup looks and feels the same, regardless of whether the team is perfection embodied or hopelessly mismatched. The humans probably look happy, meetings are happening, work is in progress. So great companies and the people that lead them, need to know how to look inside.
There are two main areas of focus that can lead to layoffs. The first is team design to constantly optimise person fit with the jobs to be done as we currently understand them. Under this, people are made redundant all the time. And hired all the time.
The second area is runway management where we are looking at the team from an investment and resources perspective. Payroll tends to be the biggest cost for a startup and it is the biggest lever to pull to extend the runway to a point when the company believes it can raise capital or be break-even.
Let’s explore each of these in turn.
Team Design Layoffs
Who is on the team and what do they do? This question is one of the properties startups must experiment with. It would be nice to think that startups can hire people into a secure job that stays the same as the role described before the interview. But that role description was probably wrong, the jobs to be done will evolve, expand or become irrelevant.
And it is not the purpose of a startup yet. It is still discovering what the sustainable version of itself does each day and who the people are that do it.
Part of building a startup is building a team that can effectively do the various jobs. And part of this is figuring out what the jobs are in the first place. The perfect team has the right people in the right seats to effectively deliver on the company’s shared mission.
This is a constant task, and alone can sweep through a company over years to replace much of the team. It is quite normal in a board meeting to hear about two or three people who have left the business and two or three people who have joined. Sometimes this is driven by performance, and sometimes it is driven by fit. Sometimes people leave because they don’t like it, sometimes they are asked to leave.
This work is more pronounced, ironically, in companies that are doing well because these companies outgrow themselves. The teams do so well at discovering the next strata of growth and opportunity that they find themselves now inexperienced to the job that needs to be done next.
If everyone in a startup accepts the responsibility of these questions, then we align the goals of the startup with the aspirations of the individual:
what are the important jobs for this company?
which ones should I/my team do?
am I still the best person for the job?
An honest interrogation of these questions may land on the uncomfortable fact that you are the wrong person doing the wrong jobs. But there are responses to that. How might I learn new skills quickly? How do we measure that? Who could I hire ‘above’ me to lead the company to the next level and teach me new skills along the way.
This does not need to be just the CEO’s job.
Runway Management Layoffs
Startups are ‘Default dead’. They still haven’t found a sustainable business model and if the capital dries up before they get to a break-even business model, they will crash into the end of a runway and everyone will be out of a job.
At any point in time, a startup needs to know the precise length of its runway and have a belief about how and when it can extend it. In a deep tech startup this is more pronounced than any other kind of venture because a simple pathway to break even is probably further away.
In the absence of break-even, this comes to an ability to raise money from investors. To do this, the investor market needs to be active with investors believing in the startup’s space, and the startup needs to be hitting targets that investors can weigh and see progress.
In the past two years, startups have been in a perfect storm where the investor market hibernated for a financial winter. Some have performed well against their milestones and others are still hunting for the hard-to-ignore evidence of progress.
This has resulted in companies avoiding raising capital or minimising the burden of a round with SAFE and convertible notes from insiders. One way to maximise runway without raising capital is to downsize the team.
Most of our companies in the Main Sequence have done this to some degree over the past two years and I am sure if we look closely at most venture portfolios the same pattern will be evident.
In recent years, we’ve seen teams grow and shrink in line with their internal priorities and changes, as well as broader conditions.
Layoffs are often seen from the outside as a sign of imminent death. But startups are ALWAYS in a state of imminent death if we come back to what a startup is. Rightsizing is a common method of providing sufficient runway for the startup to get to a point where market and evidence are ready to unlock the next stage of the runway.
As an example, one of the companies I work closely with came into the ‘venture winter’ with a runway of 10 months. A year earlier, this would have been comfortable and not unusual. In winter, this is dangerous. It cut plans to build infrastructure, ceased non-essential R&D and reduced the team size, extending its runway to 2029. It was now ‘antifragile’ for the uncertain months and years to come. As spring is now upon us, this company has options.
This is also an area of focus that does not need to be the exclusive domain of the CEO. Some of our companies are internally publishing their daily burn rate – how much they drain the bank account each day – to all employees.
In this way there is an organisation-wide perception of the sand passing through the hourglass as the company works to show evidence. There is the risk that the sand runs through, but everyone has agency to flip the hourglass before that happens.
Layoffs are a constant and healthy activity for a temporary organisation designed to find a repeatable and scalable business model.
Phil Morle is a partner at Main Sequence. This article is from Phil’s Building Out Loud column that he regularly publishes on Substack. You can subscribe to his feed here. If you have a burning question about the world of deep tech or investing, ask away.
