Since there is a recession, keep this in mind before you lay off people to cut costs

In recent weeks we have heard that several companies have announced significant layoffs; cameo and Robin Hood, among other things. Likewise, Meta announced a hiring freeze, and CEO of Uber said hiring will be a “privilege” from now on.

The main driver here is the sense of recession in the air. Of the significant decrease in the valuation of recently floated technology companies to the urgency of the Fed’s actions, the general sense is that the euphoria of private company valuations and $100 million seed rounds belong to the past.

Most startups have invested heavily in growth in recent years, but are far from profitable, so most will soon see the need to raise additional funds. Since previous funding rounds were most likely raised on overvaluations, raising additional funds will likely require a “down-round”, affecting current investors and further diluting the founders.

So the question every founder and operator should be asking is, “Should I start firing people too to cut costs?” Unfortunately, the answer to this question is not so simple, and I want to highlight both sides of this debate.

While the initial response is to cut costs quickly, companies that haven’t during similar crises in the past have managed to come out stronger in the end.

For example, during the recession of 2008, computer networking company Arista Networks saw its demand shrink and its cash reserves dwindle. While most other companies fired their R&D people to save money, while keeping their salespeople to create bigger cash buffers, Arista did the opposite and doubled down, keeping its developers and even hiring a few more, giving its competitive advantage and moat were fortified.

Arista Networks was not alone in using this strategy. A few years ago, I welcomed tech executive and investor Keith Rabois to my scaling class as a speaker. Among his accomplishments, he was executive vice president at PayPal. When asked why PayPal could be so dominant and that the core team subsequently started so many other successful companies, such as SpaceX and LinkedIn, he replied that because of the recessionary pressures when the company started, it had easy access to a dense pool of talent that would support them. eventually catapulted to success.

These stories may seem anecdotal, but there is a lesson here. In my view, we will see more investors in the coming years who prefer business models that can become more profitable. But that doesn’t mean companies should stop hiring, and it doesn’t mean they should start firing people. In fact, I’d argue that companies should answer three simple questions when thinking about scaling:

1. How do you stay differentiated?

Keeping the business as technologically viable as possible and as ready as possible is critical to maintain this competitive advantage until the economic situation changes and the economy starts to grow again. A company that has a great product or service at the time is willing to jump on that growth wave.

2. How do you create a clear path to profitability?

As I mentioned, investors are more likely to support companies on their way to profitability and provide a cash injection. So find out what the company can do in the short term to demonstrate such a path. What are the key levers you can use to move you closer to sustainable growth?

3. What is your real limitation?

I regularly ask managers what limits their ability to grow aggressively. In uncertain times, companies still need to grow, but we need to ask a slightly different question. It’s no longer about what limits your ability to grow quickly, but what limits your ability to survive or sustain yourself while surviving?

Growth is no longer the goal, survival is.

In reality, if the goal is to survive, the easiest way to achieve that is to stop spending cash. But then you undermine your raison d’être and you may end up with nothing. So surviving while maintaining a competitive advantage can actually mean hiring those who fire others, and making sure your company has quality employees in critical areas.

So don’t ask what the minimum you can do to survive another day. Concentrate on the minimum you need to do to ensure you maintain your competitive advantage while maintaining your survivability.

It is clear that hiring will become a privilege in the coming months. But those who have that privilege will be better equipped when the recovery period begins.

The opinions expressed here by businesstraverse.com columnists are their own, not businesstraverse.com’s.