The uncertain economic landscape of 2022 has left businesses and their founders between a rock and a hard place.
Many CEOs can’t afford to simply exist within the status quo frameworks they enjoyed as part of a rosy 2021. At the same time, they’re also struggling to raise fresh capital — and those who are able to raise money and extend runways are navigating the cultural complexities of down rounds.
The unfortunate reality is that many companies are instead having to cut back on staff to create more runway. This reduction in force (or RIF) is a more permanent version of a layoff where the budgetary changes that need to be made can’t be solved with a temporary change in personnel numbers.
A number of QED portfolio companies have had to execute RIFs. Many that have not yet done so are having intentional discussions about whether they should, particularly at a time when they’re dropping marketing spend and cutting back on both research and development plans and pet projects.
As experienced former operators, we have experienced these dynamics in the past. Candidly, we’re in a somewhat unenviable position of being able to help our founders navigate these choppy waters because we have been through it numerous times before.
Our best-practice advice to CEOs is to cut deep enough that they are confident there will not be a second round in the next few months.
Earlier this summer, we began sharing a five-page document that outlined our guidance with some of our portfolio company CEOs that was based on our personal experience and observation. The document was not meant to live in isolation — instead, it was a foundation upon which to build in collaboration with investors, board members and senior leadership teams. We have had extended discussions with most of our companies about the why, when and hows of making reductions.
We broke the process down into three parts — planning, execution and follow-up.
In some parts, the guidelines appear almost sterile — references to legal counsel, laws specific to local jurisdictions, shutting off access to email and Slack channels. The unavoidable reality is that while you’ll need to conduct the RIFs in an organized manner that is grounded in strong business rationale, there is always an overarching need to deliver the message with empathy and respect.
Not all companies that have executed RIFs have done so without error — even when the actual cuts happen as planned, avoidable mistakes can have a lasting effect on employees who remain.
Planning
The planning element of a RIF cannot be overstated.
It begins with assembling the team that drives the RIF and extends through risk assessments, scope, budget, scheduling and communications.
In a small company, that team may consist solely of top management. In a larger firm, representatives from different geographies, units and levels may be required. We’re working with our portfolio companies to answer a number of vital questions to be clear about the purpose, objectives and narrative.
- What is driving the need for a RIF?
- Could it have been avoided? What other options are or were available? What other actions are or could be complementary? If leadership erred, take responsibility for the mistakes.