What Everyone Should Take Away from Twitter’s 8% Staff Reductions

Today Twitter announced it had laid off around 336 jobs or 8% of its workforce. Nobody should celebrate, cheer or shout, “it’s about time.”

This is about 336 people whose lives are altered and need to begin looking for work, saying goodbye to friends & colleagues and go on that journey of transition that most people dread. I wish all of them well and feel confident that anybody employed at one of the most innovative companies of the past 10 years will land on his or her feet.

So what can we learn from this? Is it a bone headed move by Twitter? Is Twitter finally screwed as many have predicted? Is this a sign of weakness in which others can prey on the carcass of a rotting core?

None of these things. Here’s my take away. This will be seen as a watershed moment in the wake-up call and rationalization of our industry. I spoke at Michael Kim’s excellent annual Cendana VC/LP conference today. One of the points I tried to make is that as venture capital investors as an industry we seem to have an unhealthy disdain for public market investors. You can read it in VCs discussions about hedge fund managers, activist investors or the need to have dual-share voting structures.

I put up this slide as part of my discussion. The truth is that the brutal reality of public markets is that they self correct much more quickly than our shitty little private equity illiquid corner of the universe. And I actually think we could learn a lot from public investors even if we don’t always feel culturally aligned.

The truth is that Twitter is an amazing company and still has an amazing opportunity in front of it. But like many companies over the past five years it hired aggressively and probably had some degree of straying off of a core strategy and some amount of excess jobs relative to its current revenue forecasts and opportunities. When you accelerate too quickly often a pull back is inevitable as you recalibrate.

And the truth is that I think this is just a harbinger of what we will see in the private markets very, very soon. Today I called it, “our own little VC led, portfolio-by-portfolio company version of RIP Good Times from 7 years ago.”

It goes like this:

1. What is your net burn rate?
2. What is your cash balance?
3. What is your revenue growth rate and what does this imply about your number of months of capital remaining?
4. What is your realistic assessment of current strength if you went into a fund raising round right now?
5. How highly valued (or over valued) was your last fund raising event and will it make it difficult to raise / will you need time to grow into your next round?

Ok. Now that we have all that

• If your cash balance is very large, your growth strong and your numbers of months of capital is > 24 months — you’re in good shape
• If your cash balance is medium, months of capital is < 18 months and there is some potential weakness on fund raising (either due to less than stellar growth, strong competitors who raised tons of capital, huge price on your last funding round, platform risks, customer concentration risks or any other similar issue) …. then you should think hard about trimming costs and given that 80% of your costs are staff you should think about a RIF

Does this suck? Yes. It affects lives. But I can tell you that one hell of a lot more lives will be affected if you run out of cash entirely or if you get your feet too close to the fire and you end up hitting the panic button with 4 months of cash left and you lay off 60% of your staff to stay alive.

An LA company asked me if they should get out of their office lease which is expensive and I said “hell yes!” because they have limited cash (~ 1 year). Another company was going to put cash into a big office refurbishment as they moved into long-term facilities. I encouraged them to stay in shorter-term space, higher per-unit costs but no capital outlays. Not now.

I’ve heard every argument in the book about why you can’t cut office space, headcount or Kind bars. “Our company morale will go down!” “People will quit and think things are going down hill.”

Listen.

Leaders are built in hard times. It’s easy to love the boss when everything is going well. When things are hard the best leaders have teams that will rally around them. Some companies have to go first. Others will follow. We have an entire generation of startup founders who don’t have muscle memory from getting their burn rates back into shape from 2008/09 or 2001–2005.

But many of us have been there. It’s not fun. But it’s necessary. And will produce healthier cohorts of startups that get back some of the magic of being scrappy and shed some of the extra pounds we gained when the market was ebullient.

It may not be RIP Good Times.

But I’m certainly willing to say RIP Excess Burn. If you won’t do it, somebody will do it to you.

Twitter is a great product and a great company. Today’s news is sad because it’s a side of the cycle we hadn’t really seen for a beloved San Francisco institution. It will help Twitter get healthier. And my best wishes to those affected by the correction. Wishing you peace, compassion and strengths. Transitions are hard. May you land softly and seek the help of friends if you feel despair.