Layoffs As A Cautionary Tale

CEO of DeskTime—a time tracking and productivity app for companies and freelancers. He’s also an amateur athlete and father of two.

At the end of last year, the tech world was hit by a wave of mass layoffs. Companies that just a few months prior were aggressively hiring now had to fire thousands of employees.

More than 161,000 people were laid off last year, and in the first months of 2023, an additional 126,000 employees lost their jobs at tech companies, according to Layoffs.fyi. Startups at all stages, including tech giants such as Meta, Microsoft, Google and Netflix, were among the companies scaling down their teams.

What exactly contributed to these layoffs? I see several factors, including the economic downturn, inflation and plain overhiring due to companies—striving for the coveted “hockey-stick growth”—hiring more people than they actually needed.

Big Teams Don’t Mean Success: Profits Do

As Stripe laid off around 14% of their staff at the end of 2022, the company’s CEO Patrick Collison admitted, “We overhired for the world we’re in.” He acknowledged that they were much too optimistic about the future and underestimated the likelihood and impact of a slowdown.

But Stripe is only one example where hiring with future aspirations and growth in mind didn’t quite end as planned. Even with these recent setbacks, I still see the “scale-fast-and-furious” philosophy being cultivated and praised in the tech industry; companies raising millions in funding and aggressively scaling their teams are somewhat seen as more valuable than those prioritizing slower growth with steady revenues.

So, every time tech companies lay off their workforce to “prioritize profitability over growth,” it always makes me frown. Shouldn’t profits be startups’ core focus from day one? And is mass firings really the quick fix to a company’s profitability problems? Hint, it’s not.

In fact, experts say “there is little empirical evidence that layoffs help improve profitability.” Jeffrey Pfeffer, a professor at the Stanford Graduate School of Business, claims that rather than a “cost problem,” it’s often a “revenue problem” that organizations are facing.

I find such revenue and profitability problems are not uncommon in companies whose fast growth is largely based on external investments.

Copycat Behavior’s Potential Role In The Hiring And Firing Cycle

In another article, Jeffrey Pfeffer blames the recent phenomenon of companies laying off workers on copycat behavior.

In other words, when other companies in a certain industry are actively hiring in pursuit of rapid growth opportunities, others are tempted to follow the lead. Later, when the market cools down and a few major companies lay off employees, others are likely to follow suit. As a result, we find ourselves caught in a cycle of hiring and firing.

I see this as revealing the lack of coherent thinking concerning growth in today’s business culture. Instead of planning for sustainable hiring practices, too many companies nervously look at what others are doing.

Slow And Steady Wins The Race

Just to be clear, I’m not against fast growth. I believe that startups should respond to customer demands and make use of any new opportunities that appear. And if scaling the team is the most efficient way to do it, it must be done.

My company, too, doubled its team during the Covid-19 pandemic when demand for time-tracking tools exploded after companies were forced to switch to remote work. But even then, we approached this growth with cautious optimism and did not make hasty hiring decisions. We hired with current, not future, needs in mind, which allowed us to avoid layoffs once things cooled down.

I’ve seen other companies in the tech industry also practice lean growth and deliberately keep their teams small. One example is Basecamp; the project management platform is well-known for always taking a steady approach to growth and prioritizing profitability over potential. Other examples include Zapier, Buffer and ProfitWell.

In other words, large teams and huge funding rounds do not guarantee long-term success. And for employees, it doesn’t mean bigger stability and security. I think that companies that grow more gradually are less likely to fire staff at first difficulties due to their propensity for stable revenues and, generally, burn less money. This is something to keep in mind when the next hiring blitz and battle for talent begins.

A Mindset Shift For Gradual Growth

All of this requires a change in mindset to one focused on long-term growth rather than short-term gains. Meaning you should be able to accept that sometimes it’s okay to decline quick profit opportunities over long-term stability.

To be able to make such decisions and balance current versus future needs, it’s important to rely on data. I recommend you analyze how you’ve done thus far and how your customers have behaved in the past, and only then make decisions.

My own company, as well as many others that have been around, have experienced sudden spikes in user interest followed by greater or lesser decline. So, if you see a breakthrough, I recommend that you don’t rush to grow your team right away.

Wait, and if this interest is sustained, only then start looking for additional team members. Also, look to follow the rule of one hire at a time instead of hiring groups of people at the same time.

Mass Layoffs Offer A Cautionary Tale To Entrepreneurs

The recent rounds of layoffs have highlighted the fact that companies that adopt a more linear growth strategy are often more stable in times of economic difficulties. Their established and, more or less, predictable revenue is a safety cushion that can allow them to handle the crisis better and avoid drastic decisions.

A hypergrowth mindset can often lead to over-optimistic hiring, followed by letting people go as soon as the market cools down. In light of the unpredictable economic landscape, I encourage businesses to be prudent and adopt a more sustainable approach to expansion that considers realistic growth projections.

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