A Note to Founders in these Tough Times

A Note to Founders in these Tough Times

This is a note for founders who are seeing an external 'recession' like situation for the first time. We hope this will be useful for you and help you on your path to continue building the company of your dreams.

Vibhore and I started CoCubes in in 2007 which was bought in an all cash deal by Aon Hewitt in 2016. Over 10 years we saw many ups and downs. We raised venture capital, had to lay off people and multiple times change completely the direction of the company. Just after we started the worst recession hit. We were in the business of hiring. Hiring froze. And we had to let go of people. This first time we were also young and carefree. We didn't take recessions all that seriously. We just went about working on building the company without really realizing that it will now take longer that we expected to when we started. 

The second time was when we couldn't raise our venture capital round in 2012. But we realized it a little late. We pussy footed for some time to let go of people and reduce compensations. This 2-3 month delay in doing what should have been done earlier cost us heavily as we had to take on debt from friends and family on our balance sheet. I hope none of you have to do that.

Today there is a tough external environment. 

And if your company is in the stage where you will still need to raise more money to build the company out, this article should be useful for you irrespective of if you have 18 month of cash or not. If you have <18 month of cash flow then you need to be extremely aggressive in your approach to cut costs. If you have >18 month of cash, you should still use this opportunity to cut costs and focus on the long term strategy. 

Think through your long term strategy.

In all that is going on: today is not the most important. This shall pass. Don't let everyone who is saying 'cut costs' confuse you. The important question still is: what is the company that you want to build in the long run? What are your end goals? Start from there.

Then align your short term actions to your long term strategy. Don't get into a new business side to generate revenue if it doesn't work with your long term strategy. For e.g. if your company is an app focusing on sending people abroad for work (which can't happen in the current environment) then don't start posting local delivery jobs just to ensure that your users keep coming. Jobs abroad are highly paid so instead you might want to work on 'aspirational jobs' in India. So ensure your short term actions are in alignment with your long term vision. Think about do you have enough money to your goals? Do you have the right team to get there? Are you overstaffed? Have you been throwing money on marketing? Do you have too many product managers?

And as you think through..

Cut the right costs

A lot of times the wrong things seem right in the short run. It is easy to cut the wrong costs. This is dangerous. Think about what stage your company is in. If your product market fit has been achieved then may be you can let go of a few techies and keep all the sales folks. If you are still searching for product market fit then may be it is imp to hire more techies while letting go of sales folks. Think of costs in two buckets: direct costs and indirect costs. It is easy to then see which ones should you cut. 

Negotiate hard on all fixed costs (generally indirect costs)

Go negotiate again on all your contracts. Your rent contracts, the fees you give to CA, your AWS costs etc. It is highly possible that when you raised money someone else from your team negotiated these. That the person on the other side knew you had raised capital and you didn't get a great deal. Irrespective, there is always room in fixed costs. Ensure you bring down each and every fixed cost that your business incurs. This will help you in the long run. 

Make your team efficient

This is a great time to look for efficiency. In good times it is easy to keep adding sales folks to increase revenue while forgetting to have great hiring processes. In good times one keeps a lot of non performing guys because they are bringing in some money and you don't want the metric to fall even a little because what will the VC's say. This is a time to take a hard bottom's up look at your company. Is this the efficient company that you want to run? Are your costs bloated because you had VC capital? This doesn't mean that in this harsh time you let go of them immediately. If you have the cash for >18 months then you should give them 2-3 months of salary to be able to figure out next steps for themselves and help them with outplacement. But you should right size your company.

In many companies today revenue has taken a major hit and it isn't expected to come back soon enough. In such a case irrespective of whether you have cash or not, the leadership team should contribute to these hard times.

How do I talk to my team about salary cuts?

This seems hard but I can tell you they expect it to come. If you don't do it, you are basically giving the message that you don't care much about money in your company and irrespective of the loss to the company, people can continue to expect the same compensation. Whereas the message to the team has to be that our fate is tied to the success of the company. What is important is to communicate this clearly and upfront. Talk to a few of them individually. Get them on the same page. Then get them in a room (zoom room), share your salary cut and ask for theirs. These are testing times. A once in a lifetime external situation. Everyone including your best performers know it. Irrespective of if you have 18 month cash flow or not, in these times, you should make cash go further. So start with taking away last year's variable pay, followed by salary cuts and no increments. There should be no increments till business environment improves. But you should do all the promotions. These are hard earned and if people deserve to move to the next step in their career, they should be able to do so without financial gain at this point.

Will my people leave? Will this reduce morale?

This cannot be further away from truth. If your leadership team can't live through a 10-30% cut then may be you don't have the right team in the first place. The leadership team should chip in. If people have been operating on market salary then a salary cut is something that most start-ups and large companies will do in the current environment. 

How long should cuts be for? And should the company compensate for this?

The cut should be as long as the external situation demands. In your place I would refrain from giving a time frame but give the assurance that we will bring it back up as soon as we can. You could choose to convert this pay cut to 2-4X equity and vest it quarterly. What yo have done by doing this is aligned everyone more to long term outcome of the company than the monthly pay check. Also once the external environment improves and your company starts to do well, you should without doubt reward the folks who stood by the company during these times and performed well.

Should we let people go?

This is the last resort but in many companies today will be unavoidable. More so because of how the external environment looks right now. But if this has to be done, you have to do it. And you have to do it in one go. You should never do people cuts in waves. This is important because then after a cut you can tell the remaining people that they are safe and the company has 18 months+ of cash. Also treat the people who are going humanely. If you can give a generous exit package, do give that and help them take next steps in their careers. This is important for the people who are leaving, but more so for the people who are staying to know that you care for each team member.

Focus on the silver lining

There is always an opportunity in challenging times. You can find new set of users, you can use this to make your sales model efficient, you can use it to fix your product and processes or even take your company in a new direction which has opened up. It is important to recognize these silver linings and direct the focus of the entire organisation to that silver lining. In CoCubes that silver lining was getting the time to 'establish product market fit' and also 'starting to charge our customers'. Because we had no money, we had to go out and ask our customers for money. The same customers who were using it for free now started to pay and took us in a different direction. 

Make Work from Home Productive and Fun

Work from home can both be easy and hard. The only 5 things you need to know to manage your team better in work from home are below

1. Set clear goals. Think through at your end well, take inputs from team on email. Then set clear goals and measure progress weekly.
2. Do a daily stand-up in the morning with your team. Get everyone to contribute by saying: What did they do yesterday, what do they plan to do today and is there anything stopping them from meeting their goals
3. Take out time to do informal 1:1's with your direct reports. Check on how their family and they are doing. 
4. Over communicate and use as many senses as you can (zoom over phone call over chat)
5. Have fun: set up a yoga session, a fitness session, a chai room, share pictures of each one of you contributing in work at home doing jhaaru pocha! 

Finally as you go through the current times remember that you are dealing with people. They have their own tensions, predicaments, challenges. So be kind. They will remember how you made them feel. But at the same time do what is right for the company. That is your job.

All of this comes easier to people who have seen such a scenario before (2000, 2007, 2014 etc). This seems hard to do the first time. The only thing I can tell you is that at CoCubes, we had to do this twice in our journey and each time we came our stronger. Hopefully these times will bring people in your company closer too.

p.s.: And if you can for yourself: get a coach

A coach is someone who helps you think through the situation. Who you can call and discuss your deepest fears with. Who doesn't judge you like a family member, like an investor or a team member. Whose only goal is to help you become better as you build your company. For the longest time I thought I will never have a coach. I didn't need coaching. What would an older guy tell me? We are smart guys, we will figure it out ourselves. But I finally got a coach. And that coach helped us save CoCubes. If Larry and Sergey can have a coach, if Steve Jobs can have a coach, may be you can too?

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