{"id":4775,"date":"2017-06-14T09:00:07","date_gmt":"2017-06-14T09:00:07","guid":{"rendered":"https:\/\/magoosh.com\/?p=4775"},"modified":"2017-06-14T09:00:07","modified_gmt":"2017-06-14T09:00:07","slug":"growth-profit-consequences-tech-layoffs","status":"publish","type":"post","link":"https:\/\/magoosh.com\/blog\/growth-profit-consequences-tech-layoffs\/","title":{"rendered":"Growth, Profit, and Consequences: What founders should know about the rise in tech layoffs and what we\u2019re doing to prevent them here"},"content":{"rendered":"

Founders have big dreams when they start a company. They dream of changing the world and creating jobs. They dream of building a fast-growing enterprise used by millions or, in some cases, billions. They don\u2019t, however, dream of laying people off. But unfortunately, that happens all too often.<\/span><\/p>\n

In the past year, a number of companies I admire\u2014including Moz, Treehouse, and Buffer\u2014have had to make layoffs. Hoping to shed light on the issue, those companies chose to be open about their cuts and published articles <\/span>here<\/span><\/a>, <\/span>here<\/span><\/a>, and <\/span>here<\/span><\/a> about their struggles. Three businesses making layoffs may not seem like a big deal, but they represent only a small portion of the layoffs that <\/span>happened last year<\/span><\/a>. And with most layoffs going unannounced, the truth is we still have only a small glimpse of how widespread the problem really is. <\/span><\/p>\n

At Magoosh, a startup based in the Bay Area, we\u2019re vastly aware of the uptick in layoffs happening around us. But rather than shutting our eyes and waiting to see what happens, we\u2019ve made it a priority to understand why cuts happen and actively work to avoid them. Taking a cue from Moz, Treehouse, Buffer, and others who have written on the subject, I\u2019d like to share our own thoughts on layoffs: what we\u2019ve learned about why they happen, how we approach risk-taking at Magoosh as a result, and how we implemented our own layoff-preventing practices. <\/span><\/p>\n

By having more open conversations about layoffs, it’s my hope that we can promote more understanding around them and collectively start making better business decisions at the intersection of risk-taking, growth, and hiring.<\/span><\/p>\n

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Layoffs can happen for a number of reasons. Every company is different, after all. So, let\u2019s focus on one prevalent reason that has widely affected companies in the tech space.<\/p>\n

Startups, especially Silicon Valley venture-backed startups, are encouraged to chase growth. Growth can take the form of more users, more revenue, or more of something else. \u00a0The hope is that high growth (often unprofitable growth) will lead to more funding which will lead to more growth and so on. At some point the company, usually after it has a very large user base, will focus on profit with the thought that high growth at first could lead to more long-term profit. But there\u2019s a natural tension between growth (i.e. market share) and profit, and it\u2019s a tension that has existed long before the dot-com bubble in the early 2000\u2019s. In fact, the Harvard Business Review published an <\/span>article<\/span><\/a> on the subject as far back as 1975.<\/span><\/p>\n

VC firms have investors who are expecting a 6x return on their investment over a period of 10 years. In order to achieve that level of success, VCs need some of their companies to achieve massive outcomes (100x or higher), given that most of their portfolio companies will fail or return very little. Because of this, VCs are incentivized to invest in startups that aim for big growth\u2014startups that are willing to lose money month-over-month in order to grow the top line faster. \u00a0When founders take VC money, they are implicitly promising they will chase growth, not profit. <\/span><\/p>\n

Targeting growth (over profit) can be a smart approach for many companies, especially companies in a winner-take-most market. For example, Facebook, Twitter, Snapchat, and the like would not have reached their levels of success if they focused on profit early on. However, most companies are not Facebook, Twitter, or Snapchat. And most companies don\u2019t realize what they\u2019re getting into with the growth-before-profit approach. Too many of these companies\u2014energized by Silicon Valley\u2019s seemingly free-flowing cash and pervasive \u201cgrowth at all costs\u201d message\u2014end up chasing growth (to get that next round of funding), when in reality they should be focused on nailing down their value prop and developing a path to profitability. <\/span><\/p>\n

The growth-focused approach can be painful when it doesn\u2019t work\u2014<\/span>and for most startups it doesn\u2019t.<\/b> Every founder anticipates some level of failed experimentation (<\/span>\u201cThis product might fail, that\u2019s fine\u201d<\/span><\/i>), but what they don\u2019t usually think through is the <\/span>people<\/span><\/i> side of the product. In other words, when you raise a lot of money and hire a lot of people to build a product and then it fails, you\u2019re not only faced with dropping a product, you\u2019re faced with laying people off. <\/span><\/p>\n

Example: When failed experiments lead to layoffs<\/i><\/h5>\n

I\u2019ve looked up to Moz since the early days of Magoosh (2011). I\u2019ve read many blog posts, especially the ones by their founder Rand, on how to approach content marketing and how to approach building a company. \u00a0Moz and Rand have played a big part in Magoosh\u2019s growth and my own growth.<\/span><\/p>\n

So, in late 2016, I was sad to learn that Moz was <\/span>announcing layoffs<\/span><\/a>. From their CEO, Sarah Bird:<\/span><\/p>\n

This is the gut-wrenchingly painful part. The hardest part of my job is asking people who have put their hearts and souls into Moz to part ways. To align the organization with this strategic shift, we will be asking about 28% of Mozzers to leave. They are a part of the Moz family and it is heartbreaking that they will not be working alongside us in the future.<\/span><\/i><\/p><\/blockquote>\n

Moz had raised $29M to-date, a small early round, then $18M in 2012 and another $10M in 2016. While I don\u2019t know the specifics, I suspect they raised the $18M round based on the success they had up to that point, and on a big future vision of becoming more than an SEO company\u2014eventually becoming the leading provider of tools for all inbound marketing. This was a big experiment and a big risk. And after four years, they realized the risk didn\u2019t work out the way they hoped, which led to laying off 28% of their staff.<\/span><\/p>\n

Running a startup is a constant exercise in risk assessment. Sometimes big risks pay off and sometimes, as in Moz\u2019s case, they don\u2019t. \u00a0And the truth is that those layoffs\u2014while difficult\u2014were likely the right decision for Moz in the long-term. Moz\u2019s experience is just one example of what many startups go through. It\u2019s why many layoffs happen and will continue to happen. So, what can companies do? Are layoffs an inevitable consequence of taking risks?<\/span><\/p>\n

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At Magoosh, we approach business and risk-taking differently. We raised a small round of capital to get us off the ground at the beginning, and since then we\u2019ve made it a point to spend only the money that we have, using funds from our most-successful product lines to expand into new product lines and markets. It\u2019s made us a stronger company and it\u2019s insulated us from the rising tide of layoffs throughout the Bay Area, while allowing us to still take calculated risks.<\/p>\n

So, what do our business decisions look like in action? Below, I\u2019ve outlined some scenarios that many companies face. Then, I explain how a VC-backed growth-focused company would approach each scenario and compare it to how we would approach that same scenario at Magoosh.<\/span><\/p>\n

<\/hr>\n

Scenario 1: Launching one (or several) new product lines<\/span><\/b><\/p>\n

Magoosh is an online test prep company, and we periodically add prep products for new exams. For instance, we recently launched an MCAT prep product for aspiring doctors, and we have plans to add more exams in the future. Let\u2019s see how the approach to adding exams differs.<\/p>\n

VC-backed approach: <\/b><\/p>\n