Best Practices

Layoffs and Market Volatility Send Startups Scrambling to Manage Costs

By: 
Megan Hemmings

While the global market has been on quite a rollercoaster ride in the last few years, VC funding has been on an exponential rise. In fact, 2021 saw one of the greatest valuation multiple expansions in recent years. Startups were easily raising money at valuations of 70-80x their revenue. Those kind of market conditions encouraged startups to grow at all costs, secure in the knowledge that more funding would be easy to come by.

However, times are changing quickly. An article from Forbes reported that “ Startups raised $10 billion less in February compared with January, the first such dip in years.” While these numbers still represent 24% year over year growth, they are a sign that changing market conditions will require startups to approach growth, funding, and valuations differently than they have in recent years.

The war in Ukraine, record levels of inflation and rising interest rates are combining to create market conditions poised to see tech company valuations return closer to standard 10-20x valuations. However, these anticipated funding changes do not appear to be hitting the market in traditionally expected patterns. As Crunchbase states, “When funding dips month over month, we typically expect it to be dominated by a cutback in late-stage funding along with a slowdown in investing pace by growth investors. What we found instead was that seed-stage funding grew slightly month over month, while early-stage funding fell 17 percent, and late-stage funding dropped 19 percent.”

What this means is that post-series B companies need to change their thinking from short-term success towards long-term sustainability. While companies should still aim to grow as much as possible, the growth needs to be sustainable in the long-term and be backed by revenue.

Spend Controls: All Gas, No Brake

No one wants to be the company making headlines for enacting massive layoffs, but if a company scales too quickly without proper revenue to back the growth, layoffs become inevitable as these recent examples show.

While many companies are sitting on longer runways from cash raised in the second half of 2021, we are seeing an increased focus from leaders on hitting aggressive sales forecasts while maintaining a reasonable cash burn. 

Very few companies have been able to match slowing revenue growth to adjusted hiring targets effectively. Hiring plans are disconnected from central planning functions outside of quarterly or semi-annual planning periods. That means without real-time influence over headcount, companies are operating for 3 to 6 months at a time without any strategic shifts.

What Can Companies Do to Get Controls in Place?

With all these changes in the market, companies need to be mindful of how they spend their money - the biggest bucket of which goes towards headcount - and grow their headcount intentionally.

There are a few steps you can take to do this:

  • Plan your headcount appropriately along with forecasted growth
  • Implement proper approval channels to ensure only necessary hires are being approved
  • Balance work with resources - this one requires you to determine priorities based on number of hires vs time to market
  • Rely on benchmarks
  • Create efficient processes before assuming you need a new body

If you are unsure if your company has the right people in the right place, this article breaks down target org charts for various funding rounds.  We’ve also started a series on how to build out each department that details when to start a department as well as how to structure them as you grow.

Emergency Brake

One important way to protect your company from facing the tough decision to layoff massive amounts of staff is to build an emergency brake into your hiring plans. Rather than working off multiple spreadsheets that can be difficult to reconcile and quickly make changes to, it is important to create a single source of truth for your headcount plans. A single place where hiring managers, Recruiting, HR and Finance can all go to quickly evaluate and adjust approved plans, allowing your company to make changes in minutes rather than weeks or months while also ensuring everyone has the latest information.

Don’t let changing market conditions catch you unprepared. If you’re ready to build an emergency brake into your hiring plans, schedule a demo to see how TruePlan can help.

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