Published in the San Diego Union-Tribune, June 5, 2023
by Neil Senturia
For those of us who have recently been told by the venture capital community to pound sand, it is time for a little schadenfreude.
According to PitchBook, “for the first time in more than a decade, returns for venture funds were negative for three consecutive quarters last year.” The yearly internal rate of return was minus 7 percent in the third quarter of 2022.
While you might say that it couldn’t happen to a nicer group of guys (mostly guys, unfortunately), there is a corollary downside double whipsaw to the impending down-round looming on the horizon. And that is when you need more money from the VC who once loved you, he now tells you that his well is dry, but that nonetheless his commitment and support remain unwavering and to show his deep appreciation, he sends you a six-month supply of ramen, so the only thing left to do is boil the water.
Nice. But now what about your employees? The question the CEO must deal with is not so simple: Do I cut people or do I cut salaries? I do not pretend that this rises to the level of a Sophie’s Choice, but let’s see if we can find the right answer.
For that, I turn to Christopher Stanton, researcher at Harvard Business School. Now before I give you the answer, take a moment and write down your guess. The economic downturn is upon your little company, the VC pocket is turned inside out, so what do you do? That sounds a bit like Mr. Wonderful from “Shark Tank.”
Stanton says, “Companies looking to shed costs typically slash jobs, and the research confirms the wisdom of that decision.” Here is a lovely stat from Layoffs.fyi: 715 tech companies have laid off approximately 199,845 people so far this year. Last year was 164,000. Welcome to America.
Stanton makes a persuasive case that if you cut compensation, the best people, the superstars, will leave and go elsewhere. “If you are a top performer, you can vote with your feet.” But, if you cut jobs, the company can be more surgical (we hope), jettisoning the “less productive.”
The study was based on salespeople’s commission compensation levels in a call center. But one fact was puzzling. Even when they cut commissions of the very best salespeople, they stayed on, because they were making a lot of money, and they couldn’t get a better deal at another company.
Now, allow me to suggest an alternate storyline. I have founded or co-founded eight or nine different companies, and every one of them at some point has found its balance sheet in need of an infusion of cash.
I did a two-step. Yes, the least valuable employees were cut. Then I went to a select group of the key management and business development folks and asked them if they would accept a temporary reduction in pay, a deferral, with the full intent that if we survived, it would be made up in whole. Then I offered some additional stock option grants, “a spoonful of sugar helps the medicine go down.”
Almost universally across all the companies, the answer was yes. Reductions ranged from 20 percent to 40 percent, but no one left. What I saw was that the hard time was a catalyst for team building. We are all in this mess together. Nobody slacked off, in fact, they worked even harder.
There is one caveat to a pay cut. The CEO must be transparent and show all the numbers and make a compelling case that there will be a light at the end of the tunnel. And he/she must take the deepest cut.
Adversity provides the opportunity for community. But you cannot hide the banana. You are playing with people’s lives and that is serious business.
On a more salutary note, I recently went to Connect’s “Cool Companies” presentation where a healthy cohort of venture capitalists met with 30 startups. In a word, it was damn impressive. Give a shoutout to Connect CEO Mike Krenn and his team.
They looked like “real companies,” and I was thrilled for our technology ecosystem. San Diego may never be Silicon Valley — but if we vigorously tend to our own garden, I think lots of fruit and vegetables will be harvested.
Rule No. 763:
“How does your garden grow?” – Mary, Mary, Quite Contrary