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I’m Karim, and every few weeks I tackle questions or problems I’ve witnessed in startups from the very early stages up to late growth stages.. Much of my startup experience has been in leading engineering organizations, but I cover topics outside of engineering as well.
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We’re in the middle of another tech driven down-turn - the third one in my career thus far. While it’s too early to say how hard and long this downturn will last, it is prudent to plan for the worst and hope for the best. The planning and actions that companies take now, might be what propels them to success once this downturn ends, which it will, eventually. So what should engineering leaders at startup do to try and weather this downturn?
First you need to acknowledge your present situation. Your ability to outlive this downturn is primarily predicated by your cash runway, or how long you can run your business without the need for external capital. Redpoint’s Tomasz Tunguz offers a handy 2x2 that can help you determine your current situation. If you lie on one of the left quadrants, your primary concern will be cash preservation and maybe even finding additional sources of capital at potentially unfavorable terms. Companies on the right quadrants have it somewhat easier, although cash preservation and laying the foundations to profitability will also be primary concerns for these companies.
Once you’ve identified and come to terms with your situation, the next phase is to do what any leader should be doing regardless of the macro economic environment. You need to be a good custodian of your company’s capital and resources. You must allocate those wisely. The current downturn amplifies this need, but in all honesty, you should be doing this regardless of the macroeconomic environment. There are three levers that an engineering leader can pull that affect profitability and cash runway. These are hiring, focus and COGS.
It should come as no surprise that the largest spend account within a software engineering organization, and likely most startups, is headcount. The biggest lever an engineering leader has in terms of adjusting cash flow is hiring. As I mentioned earlier, I do not believe that a downturn should trigger hiring scrutiny. As the head of engineering, you should be judicious with company resources regardless of the macroeconomic conditions.
Startups are in a race towards financial independence. That is a function of attaining product market fit and then scaling to cash independence (cash flow positive) Doing so requires all budget owners, heads of engineering in particular, to be judicious and careful with how they allocate resources. Spend what you need to, in order to drive the business forward versus spending because you have the cash in the bank.
If you believe that your company is in the right quadrant, especially in the upper right, then I would argue that tapping the breaks on product development would be a mistake. You should continue to invest and push your product further ahead. Keep in mind that hiring will likely be easier. BigTech and startups alike are slowing down hiring. If your goal is to grow, now might be a great time to be actively hiring. On the other hand, if your company lies on one of the left quadrants, then you might be contemplating some harder choices: laying off some of your team.
Focus is a topic I covered in a previous post. While focus becomes even more essential in turbulent times, it must be an activity that every product and engineering organization adheres to regardless of the market. When cash was free, it was not unusual to try and do “more”. After all, you could go on a hiring spree to add more features to your product or launch a new SKU. Focus brings the discipline of asking whether these investments are needed, regardless of the available resources. Are they accretive to the business? What is the opportunity cost of doing this work? Focusing, and recognizing your constraints will allow you to come up with a better solution than throwing money at the problem.
“The fastest way to move a dial is narrow the focus. People naturally resist focus because they can’t decide what is important. Therein lies a problem: people can typically tell you after some deliberation what their top three priorities are, but they struggle to decide on just one. They may also be incorrect about their priorities, so there is potential for misallocation of resources… When you narrow focus, you are increasing the resourcing on the remaining priority. It doesn’t have to time-slice and compete any more with a bunch of other stuff. ” Amp it Up! by Frank Slootman
Although the vast majority of an engineering organization’s costs are headcount, there could also be significant amounts of money spent on infrastructure. The infrastructure an engineering organization uses could be for active product development. It could also be the infrastructure that hosts the (SaaS) products that the company sells. The latter has direct implications to margins as it is considered COGS. Regardless of the accounting categorization of this cost, you should always ensure that you are using the right set of resources both in terms of active R&D and ones that host your SaaS products. A few metrics I look at to understand my cost usage:
Overall cloud/infrastructure costs tracked over a period of time
Cloud/infrastructure costs normalized by usage (users/tenants)
R&D costs normalized by headcount
There is no doubt that this period is stressful. There is much uncertainty now then a few months ago. There is also the continuous drum beat of the end of the “good times” and news of layoffs or hiring freezes on a weekly basis. Your team will undoubtedly be worried about their future, about the future of the company. If there’s ever any time to over communicate, now it is. You need to communicate and be ruthlessly honest with your team, especially if your company is in a precarious position. You should share with your team your plans to weather this period. Are you cutting down on costs, how? Are you down-prioritizing projects? What areas will you continue to invest in? Your communications needs to be balance transparency, without being an alarmist, especially if your company’s position lies on one of the left quadrants. Communication, especially transparent and empathetic, helps you drive the narrative and might be what keeps your team together during this period.
I mentioned earlier, that the macro economic environment should not be a forcing function to evaluate how resources are allocated. That rigor should be applied irrespective of how much cash a startup has in the bank. As such, I tried to map the activities that an engineering leader ought to be doing using the same 2x2 from Tomasz’s article. The differences are very nuanced.
This is my third tech downturn, and likely won’t be the last. Good companies will survive regardless of market turbulence. In fact, I’d argue that they will emerge stronger and healthier. Focusing on building long lasting and profitable companies is the very essence and joy of a startup. After all, what is the thrill in building a company that spends $1.25 to make $1.00 in revenue.
Focus, act wisely and quickly. This too shall pass.