As Tech Layoffs Pile Up I Have To Ask—Is This The Best We Can Do?

As an economic downturn looms no one is asking a fundamental question… Does this approach to company building make any sense?

3 min read

The last few weeks I’ve opened Twitter each morning and read reports of well known tech companies laying off thousands of people. Advice is flying from every direction on how to prepare for an economic downturn, what actions must be taken, and how we can best insulate ourselves and our companies.

But in all that I’ve read no one seems to be asking a fundamental question…

Does this make any sense?

I’ve been laid off before. I’ve also laid people off. It sucks, thoroughly. 

Layoffs are often massively disruptive to people’s lives—people actually lose their healthcare coverage, mortgages don’t close, and parents watch their hard earned savings slip away that they’d earmarked to do something special for their kids. 

I feel for all of the people that have lost their livelihoods. But I know I’m not going to change the minds of many people in tech simply by pointing out the human level costs of layoffs. 

It drives me crazy that the tech industry is so quick to accept this as “how business is done.” But what upsets me most is when I see people in our industry not only accept this so easily, but in many cases even applaud CEOs who take swift course correcting measures for their leadership.

Look, I get it. Being a CEO can be lonely—CEOs are the ones that need to make the tough calls. CEOs need support, too. But celebrating this? Calling this leadership? Calling this bravery?

Come on

As if there was no other way.

Is this actually the best path to grow aggressively?

This post is in no way a rallying against venture capital. 

I have deployed tens of millions of VC dollars and my personal experiences with VCs have been overwhelmingly positive. They’ve pushed me to be better at my job and have been successful in helping the start-ups that I’ve worked at achieve more significant financial outcomes. 

Similarly, I’ve experienced the benefits and drawbacks of bootstrapping first hand—that’s not the debate that I’m here to have today. 

If anything, I’ve been an outspoken proponent of the idea that how you choose to fund and operate your business has to match your objectives. These are both personal and strategic decisions, not some sort of us versus them dichotomy. To each is own.

But I am asking you to use this moment to stop and think critically for yourself about two of the predominant attitudes and behaviors that permeate the VC world—two that really irk me.

  • First, that this burn then churn method of building companies actually produces the best financial outcomes.
  • Second, that we should so readily accept and celebrate the actions of CEOs that would be hard to write off as anything but lousy if you didn’t have a financial interest in their company.

Even if your burn rate is intentional, layoffs are at least indicative of less than ideal financial management. And what does this say about how we think about our people and team?

Healthier businesses generate healthier returns

I have a fundamental belief that the health of an organization directly correlates with its ability to achieve financial success.

Any VC that’s read a little Patrick Lencioni is probably rolling their eyes at that statement, even as they agree that organizational health is a huge competitive advantage.

But I think it’s fair to say that massive rounds of layoffs are at least an indication that something’s not quite right internally—some aspect of how you’re building your business isn’t adding up and you’ve over-indexed in some direction. I fully understand investing in growth and running our companies at a loss—it certainly can help us grow faster. But if doing so results in so much employee carnage at even the first sight of an economic downturn, have we really stopped to analyze what this says about the health of our organizations?

Layoffs may free up cash flow, but they have massive costs in terms of internal turmoil. In terms of market sentiment. In terms of employee morale. In terms of how we feel about our leaders.

While our investors may excel at financial accounting, have they stopped to do any human level accounting? Have they even attempted to quantify what these layoffs mean to an organization beyond its balance sheet? I think we need to ask a fundamental question that should turn the ears of even the most cold blooded investors.

Is this yo-yoing symphony of bloat—of over-capitalizing our companies to drive up valuations then dumping headcount at the first sign of trouble—actually helping us grow more successful businesses? 

It’s very much like a two cars speeding down the highway. One accelerates to 100mph, tailgating just inches off the bumper of the car in front of it, before slamming on its brakes at the first sign of brake lights. It falls well behind then accelerates back to its tailgating position—over and over and over.

The second car maintains a steady speed of 80mph, maintaining a slightly more conservative position a few car lengths behind the car in front of it. Two different approaches to get to the same destination, but is either necessarily getting there any faster? 

Probably not.

Yet the first car’s chances of a terrible crash are exponentially higher…and that’s how we’re building our businesses!

Over the course of my career, the companies that I’ve seen generate the largest financial returns are mostly those that treated their team as their biggest asset, not their biggest resource. They were the companies that were very aggressive when it came to growth, but were appropriately aggressive. They didn’t increase their burn rate simply because they could, or to appease investors into feeling that they were doing absolutely everything they could to accelerate growth as much as humanly possible in any given moment.

They were the companies that hired cohorts of four new sales reps at a time rather than 20 new reps at once. The companies that were run diligently and aggressively, yet always put themselves in a position to have options aside from axing off their own arm. And above all else, they fundamentally believed that treating people well resulted in more loyal, more engaged, and more effective employees—that’s what fueled their growth!

I’m well aware that you can show me pretty graphs that demonstrate that venture backed companies grow faster than their bootstrapped counterparts—of course they do! But do we really have any evidence that this pedal-to-the-metal, then slam on the brakes approach to building companies is yielding optimal outcomes? Or even better outcomes than an approach that’s even slightly more measured and sustainable?

I’m placing my bets on the latter approach.

I want to be very clear that I’m not advocating against the traditional VC path of building companies. I’d advocating for looking more closely at say the last 20% of our burn rate. I consistently see that this results in little more than dead weight spending—and it’s often this bit of excess that puts companies in a scenario where they have no workable path forward when times get tough. 

Why are we so quick to accept and celebrate such suboptimal behavior?

Beyond whether this approach to company building is actually optimal, I think it’s worth turning a lens on how VCs often behave in times like these. In controlling millions or billions of dollars, VCs hold enormous influence not only on our industry but on society at large—all the more reason to consider their actions carefully. 

VCs prioritize generating returns for their LPs—that’s the name of the game. But I think we’re far too quick to allow VCs to use that as a shield, somehow allowing them to punt on accountability to anything other than growth.

I see too many VCs playing the "game of business," without really considering the human level consequences of how we're building our companies.

I know many VCs will likely scoff at that sentiment, but look at their behavior. I hear the enthusiasm in their voices as they dramatically increase burn rates, with little thought for the potential consequences. And I hear them quick to applaud CEOs who act swiftly in laying off thousands of workers. Hey it's "do what you gotta do," right? They can easily sit back and collect their management fees, weathering the storm with little disruption to their day to day lives.

It’s similarly easy for founders to sit back and rationalize the financial rewards they’ve earned and their right to remain on the ship. Both founders and VCs have put themselves in positions where they’re most often insulated from the human level wreckage, but let’s not desensitize ourselves to this to the extent that it’s merely accepted as the norm.

I see otherwise good people in the VC world go to crazy lengths to defend the leaders and companies that they’ve backed, when objectively their actions are not the ones that we should be applauding—if only because the actions make them more likely to succeed.

A term sheet should not be a contract to back a CEO regardless of how he or she acts. A term sheet should be an agreement to help that person lead and grow their company more effectively.

Let’s look at an example to bring this discussion full circle.

Coinbase and Brian Armstrong are in the news…again

Perhaps no company can be used to illustrate my points more clearly than Coinbase and their CEO, Brian Armstrong. I’ve been critical of Brian before—nearly every major decision he’s made, I find myself thinking “Wow, what a missed opportunity—I’d do exactly the opposite.” 

And that’s OK! Brian is running a public company and has had far more financial success than I ever will. 

But what bothers me far more than Brian making decisions that I personally disagree with is that the decisions he’s making demonstrate the absolute antithesis of leadership. Here’s a quick recap:

  • In 2020 the United States was on fire with issues of racial injustice and inequality. People who had been persecuted for hundreds of years were literally crying out for help. Brian felt compelled to address these societal issues by writing a letter saying “we’re not going to engage with this, it’s not part of our mission.” 
  • This month some of Coinbase’s employees called out their leadership for being ineffective—a move Brian very publicly called “really dumb on multiple levels” while saying “99.9% of the company has important work to do.” Just four days later, he laid off 1000+ people—roughly 18% of his staff.
  • The night prior to the layoffs, Coinbase ran ads on national TV downplaying the economic downturn—the very reason they provided the next day for the layoffs.

Brian has absolutely no obligation to use Coinbase as a platform to fight racial injustice. Nor does he need to run his company on anybody else’s terms. But his actions tell a consistent story that’s tough to interpret any other way:

We’re prioritizing profits over people. 

I’m only using Brian and Coinbase as an example because they have enormous resources and were uniquely suited to help people in these instances. I also genuinely think that these were missed opportunities, that actually could have helped Coinbase run a more successful business. Coinbase aims to “increase the economic freedom of the world”—it seems to me helping to combat hundreds of years of racial inequality and keeping your own team employed presented two opportunities to do just that.

They chose not to.

Would Coinbase be any less successful if Brian had made more people friendly decisions? If he’d chosen to run the company more appropriately aggressively? I think we’re fooling ourselves into believing that. But the real issue that I have is that so many people are choosing to celebrate the actions of CEOs like him. They call them effective “wartime CEOs,” they call them brave, they call them leaders.

Shouldn’t we be asking…

How did they end up in this position? And is this approach even optimal in the first place?

What real leadership looks like

When I grew up my dad was an entrepreneur. There were several instances throughout my childhood where my dad didn’t pay himself so that he could pay his employees. Call me old fashioned, but I call that leadership. 

In my world real leaders make sacrifices to support their team, rather than sacrifice their teams to support themselves. 

You may argue that Brian is running a public company—my dad wasn’t. But that argument doesn’t hold up—the sacrifices that my dad made had a very real impact on his family. They were actual sacrifices, with consequences, so that someone else could lead a better life. That’s leadership!

Public companies exist to maximize shareholder value, yes. But can we stop using this as a scapegoat, as an excuse to rationalize away behaviors that we’d otherwise refer to as… suboptimal? Can we please stop trying to just explain this away so easily?

I understand the counterarguments:

  • Public companies need to create shareholder value above all else
  • Taking on societal issues can be a distraction from our mission
  • Information on layoffs needs to held close to the chest
  • Of course it’s in Coinbase’s interest to downplay the economic downturn!

These are all reasonable thoughts—but why are we so quick to disregard the other obvious realities of this situation? If you confront them with an equally open mind, it's a pretty absurd sounding story.

  • Coinbase has an enormous amount of resources that could be used to positively impact society, their team, and their bottom line. 
  • Instead they chose to run with a massive burn rate chasing higher valuations, turn their back on populations in need, and refer to questioning the competency of their leadership as “dumb on multiple levels.” 
  • The CEO then lied publicly saying by saying “99.9% of the company has important work to do” only to lay off 1000+ people just 4 days later.
  • Oh, and he did it  via email…
  • Offering four months of Cobra health insurance…
  • All the while living in the comfort of his $133 million dollar house!

It's almost hard to make this shit up! Yet we've come to accept this at face value. If you were one of the employees at Coinbase that was laid off, what could this possibly communicate to you in terms of how you're valued?

What version of tech-enabled dystopia have we come to accept as normal?

Let’s reconsider what we’re celebrating, who we’re looking up to as leaders, and let’s take a few moments to think for ourselves. Is this cycle of burn then churn company building really the best approach or are we just nodding our heads blindly, accepting whatever some VC says on Twitter as fact?

What does it say about us as an industry that we’re just two months into an economic downturn, people are losing their jobs in the thousands, and we’re applauding CEOs for “doing what they need to do?”

Brian himself is quick to call out that for all of Coinbase’s spending, the company started operating less efficiently. Yet it wasn’t an analysis of Coinbase’s spending and efficiency that resulted in the layoffs—it was the mere beginnings of an economic downturn that was the impetus for the layoffs. Shouldn't we be looking at the efficiency of our businesses more regularly? If we're not that's a pretty clear indication that our "leaders" are running their businesses with very little concern for their people.

What does that tell us? I think it’s a strong case for more closely inspecting whether this approach is actually helping us build better businesses.

My call to action

So what’s my objective in writing this post? As the founder of an independent, bootstrapped start-up I have no horse in this game. My hope in writing this, above all else, is that more people in tech who feel the same way take the time to speak up and question this narrative.

There’s an entire up-and-coming generation of people entering the tech industry—let’s show them that there are alternatives, that we can better build high growth companies, and that we should question whether blindly increasing our burn rate as much as possible is actually producing better financial outcomes.

  • I want you to think more critically on your own—how do you think the most successful companies can be built? Is this really the best we can do, or are you blindly accepting the status quo because it was relayed to you by some famous VC on a Tim Ferris podcast?
  • I want to hold us all—and especially our investors—accountable to standards beyond solely maximizing financial returns. If you have a friend that’s a VC, that’s a good person, point it out when they’re clearly rationalizing away bad behavior or celebrating those that probably should be more reflective on their own decisions.
  • I want us all to better celebrate the companies and CEOs who truly deserve our admiration—not the ones that put themselves in lousy positions chasing valuations, only to wriggle themselves free at the cost of so many people’s livelihoods. 

Even in the heavily venture backed world, there are plenty of examples of companies that are chasing and achieving enormous growth objectives—all the while running their companies in a very human and responsible way. Billion dollar companies like Hubspot come to mind and leaders like Vlad Magdalin at Webflow are proving daily that you don’t need to choose when it comes to optimizing for your people or your growth. I think how we treat our people is much more tightly correlated with growth than the tech industry seems to believe.

Let’s more actively celebrate these stories, rather than bemoan how hard business can be. 

I know many people will read this post and discard it with little thought. But even worse are those that agree with its points yet sit back and accept the status quo, afraid to voice their opinions for fear that they may be closing the door to a VC meeting that may just hold the key to their own future financial successes.

At the end of the day, businesses are just teams of people. If you’re not able to think critically about how we can best build them, you’re little more than a rat trapped on a hamster wheel.

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