CEO of DeskTime—a time tracking and productivity app for businesses and freelancers. He is also an amateur athlete and the father of two children.
At the end of last year, the tech world was hit by a wave of mass layoffs. Companies that were aggressively hiring just a few months ago now had to lay off thousands of employees.
More than 161,000 people were laid off last year and another 126,000 employees lost their jobs at tech companies in the first months of 2023, according to Dismissed. for your information. Startups at all stages, including tech giants such as Meta, Microsoft, Google, and Netflix, were among the companies winding down their teams.
What exactly contributed to these layoffs? I see several factors, including the economic downturn, inflation, and the fact that companies – striving for the coveted “hockey stick growth” – are hiring more people than they actually needed.
Big teams don’t mean success: profit does
As Stripe laid off about 14% of their workforce at the end of 2022, the company’s CEO Patrick Collison said allowed, “We’ve taken on too much for the world we’re in.” He acknowledged that they were far too optimistic about the future and underestimated the likelihood and impact of a slowdown.
But Stripe is just one example where hiring with future ambitions 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 that raise millions in funding and aggressively scale their teams are seen as somewhat more valuable than companies that prioritize slower growth with stable revenues.
So every time tech companies lay off their staff for “prioritizing profitability over growth“It always makes me frown. Shouldn’t profit be the core focus of startups from day one? And are mass layoffs really the quick fix for 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, argues that instead of a “cost problem,” it is often a “revenue problem” that organizations face.
I find that such sales and profitability problems are not uncommon in companies whose rapid growth is largely based on external investment.
The Potential Role of Copycat Behavior in the Hiring and Firing Cycle
In another article, Jeffrey Pfeffer blames the recent phenomenon of companies laying off workers copycat behavior.
In other words, when other companies in a particular industry are actively hiring to pursue rapid growth opportunities, others are tempted to follow suit. Later, as the market cools down and some big companies lay off workers, others are likely to follow. As a result, we find ourselves caught in a cycle of hiring and firing.
I see this as revealing the lack of coherent thinking about growth in today’s corporate culture. Instead of planning for sustainable hiring practices, too many companies look nervously at what others are doing.
Slow and steady wins the race
Just to be clear: I am not against rapid growth. I believe that startups should respond to customer demands and take advantage of new opportunities that arise. And if scaling the team is the most efficient way to do it, it should be done.
My company also doubled its team during the Covid-19 pandemic, as demand for time tracking tools exploded after companies were forced to switch to remote working. But even then, we approached this growth with cautious optimism and didn’t make any hasty hiring decisions. We hired people with current, not future, needs in mind, which helped us avoid layoffs once things cooled down.
I’ve seen other companies in the tech industry also apply lean growth and deliberately keep their teams small. An example is Basecamp; the project management platform is known for always taking a steady approach to growth and prioritizing profitability over potential. Other examples include Zapier, Buffer, and ProfitWell.
In other words, big teams and massive funding rounds are no guarantee of long-term success. And for employees, this does not mean more stability and security. I think companies that grow more gradually are less likely to lay off staff at the first hit because of their tendency to steady revenues and, overall, burn less money. This is something to keep in mind when the next recruitment blitz and battle for talent begins.
A mindset change for gradual growth
All of this requires a mindset shift to one that focuses on long-term growth rather than short-term profit. This means you have to be able to accept that sometimes it’s okay to reject quick profit opportunities instead of long-term stability.
To make such decisions and balance current versus future needs, it is important to rely on data. I advise you to analyze how you have done so far and how your customers have behaved in the past, and only then make decisions.
My own company, as well as many others already out there, have experienced sudden spikes in user interest followed by more or less decline. So if you see a breakthrough, I advise you not to grow your team right away.
Wait, and if this interest continues, then start looking for additional team members. Also, try to follow the one hire at a time rule rather than hiring groups of people at once.
Mass layoffs offer entrepreneurs a cautionary tale
The recent rounds of layoffs have made it clear that companies with a more linear growth strategy tend to be more stable in times of economic difficulty. Their established and more or less predictable income forms a safety cushion that allows them to weather the crisis better and avoid drastic decisions.
A hypergrowth mindset can often lead to overly optimistic hiring followed by people being let go once the market cools down. In light of the unpredictable economic landscape, I encourage companies to err on the side of caution and adopt a more sustainable approach to expansion that takes into account realistic growth projections.