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Utah Business

Utah CEOs grapple with the reality of layoffs as venture-backed startups mature. Here's how they're dealing with it.

Utah Startups Face Their First Round Of Layoffs

Let’s just say that 2016 was not Brandon Rodman’s year.

On the surface, things were going great. The CEO and cofounder of rising health communications platform Weave, Mr. Rodman had successfully raised multiple rounds of funding and built his company from the ground to more than 100 employees. Behind the scenes, however, the picture was less rosy—four years beyond their first round of funding, Weave was still losing money most months. They needed to raise more capital to keep the company afloat, but investors were increasingly wary of a company that was struggling to compete on metrics outside of top-line growth.

“It wasn’t that we were running the company differently than others ran their companies. Essentially, all startups are running their company that way,” Mr. Rodman recalled to me earlier this summer. But simply posting growth, and not meeting profit targets, was no longer enough. 

Realizing that future investors would keep Weave on an increasingly tighter leash, Mr. Rodman decided it was time for Weave to leave its startup stage behind and begin behaving like a mature, grown-up business. That summer, instead of raising another round of funding as expected, Mr. Rodman laid off 35 employees.

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“We intentionally said, we’re going to slow down on that top-line growth,” Mr. Rodman says. “So a lot of people that we had to let go of were in marketing and sales, because we wanted to make sure the other metrics in the company were healthy.”

Three years later, Weave is no longer alone. A half-dozen, high-profile players in Utah’s tech scene, including Canopy, Younique, Upwell Health, and even established companies such as Overstock made waves earlier this year when they laid off considerable chunks of their staffs. 

Although the news spread rumors of mismanagement and instability, the turn of events is to be expected, according to Chad Packard, a partner at Pelion Venture Partners in Cottonwood Heights. While each of the layoffs involved unique circumstances, Mr. Packard says the overall trend is likely a symptom of a “maturing phase” in Utah’s tech industry.

Using venture capital as the wrong kind of drug

Utah tech companies, Mr. Packard says, have enjoyed a decade-long sellers’ market, in which there’s more venture capital in the state than there are startups in which to invest it. And though most Utah companies have done relatively well, most are still in their infancy.

Unlike more mature companies, he says, these young companies aren’t necessarily profitable. Of the 40-50 companies actively receiving funds from Pelion, Mr. Packard says, only three, four, or five are actually cash flow positive. For the rest, the name of the game is managing growth targets and healthy cash burn rates.

That was the case for the first four years at Weave, Mr. Rodman says. But the company kept hitting its growth goals, and the venture dollars kept pouring in. Eventually, he says, investor funding became “like a drug” for the company—an unhealthy dependency that kept it from achieving its true potential.

“With all drugs, they can be abused or they can be used the right way,” Mr. Rodman says. “And along with a lot of other companies, actually the majority of other companies, we were using venture capital as the wrong kind of drug.”

Mr. Rodman believes Weave’s “addiction” to venture capital began shortly after the company was founded. The company joined Y Combinator, a top-ranked California startup accelerator in 2014. At the time, Mr. Rodman says, the attitude in the venture capital industry could be described as “growth at any cost. You can fix everything else later.”

Raising capital became an end unto itself—a means of external validation. But over time, customers became less interested. Churn increased. The cost of acquiring new customers grew. And eventually, the investors themselves became less interested.

Mr. Rodman believes Weave could have raised another round of funding in 2016, but the terms, he says, would have been onerous as investors sought to bring the company’s spending more in line with its revenue.

Starting a company, Mr. Rodman says, is all about the end goal—a sense that one is getting to the other side of a mountain. But sometimes, he says, the way around the mountain isn’t what you thought. “You thought you were going to go over it, but you might have to go around. It might be under it or through it,” he says. “And we realized the path that we were hiking on was a dead end. Now we gotta go back down the mountain and figure it out.”

Weathering the bumps along the road

It’s not unusual for a company to eventually realize it needs to change direction and restructure or “right-size” its staff, says Mr. Packard, who was involved in layoffs at both Weave and, more recently, Canopy, as a board member representing Pelion’s interests in those companies. 

“It happens with most of our companies at some point,” he says, where we say “hey, we had x, y, z plans, we thought we were going to grow at x percentage, and it turns out we missed our numbers.”

Then, he says, “there are hard, not fun decisions that have to be made.”

Once Weave realized they had to reconsider the company’s relationship to venture capital and revenue—even if it required taking the company backward a few steps—Mr. Rodman says the hardest part was explaining to his employees why they were losing their jobs.

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“It’s easy to justify it and say, well, this company did the same thing and it was worse for them and the entire market operated the way we operated, so we weren’t doing anything wrong,” he says. “But it was on me. And those 35 people who lost their jobs, that was on me. So the hardest part is just reconciling like, I caused this.” 

But there were valuable lessons to be learned in executing his plan, Mr. Rodman says. He quickly realized that the standard line, “it’s not personal, it’s just business,” was false. A job, he says, is a very personal thing to someone who has put eight, 10, even 12 hours a day into their work. And it’s not just the job or the hours, he says—these people had kids, they had families. An hour ago they had the ability to support the people in their lives, now they did not.

“There’s a temptation to go hide in an office,” and let someone else dole out the pink slips, Mr. Rodman says. But that, he decided, was the wrong way to go about things. He needed to be there for his former employees. He needed to be the one to explain they were losing their jobs because of the way he had run the business, not because of anything they had done. 

Mr. Packard agrees with his strategy. It’s critical, he says, for company leaders to get out ahead of the rumor mill by being candid and transparent about why layoffs are necessary.  For those who are let go, Mr. Packard says, Pelion “opens our Rolodex” and tries to get employees—valuable talent in Utah’s market—into other companies as quickly as possible. For those who remain, he says, it’s critical to build a strong company culture, doubled down on morale and ensuring staff understands why they are now in a better position to move the company forward.

Gaining a long-term perspective

Pelion also pays close attention to the leaderships’ mindset, working with them to help them understand that the situation they are in is not unique and that they must keep their eye on the long-term vision for the company.

“You have to have the perspective of, this is a short-term blip I have to overcome,” he says. “I try to help our founders see that, look, there are very few companies out in venture land that don’t hit bumps along the road. You may think they don’t hit bumps, but it’s just because you don’t know what was happening behind the scenes.”

But in the local positivity-focused startup culture, Mr. Rodman says, it can be hard to realize this truth. Instead, it can seem as though “every founder’s crushing it, every company is doing amazing.”

Real talk between founders, Mr. Rodman says, would not only help entrepreneurs maintain a more realistic mindset, but might help avert the overcapitalization that can result from seeking validation from venture capital. Through Y Combinator, Mr. Rodman says, he joined a coaching group of eight other venture-backed CEOs that helped see him through the 2016 layoffs, which he believes ultimately made his company stronger.

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Weave resumed and eventually accelerated its growth in 2017, and is now approaching 500 employees—some of whom, Mr. Packard points out, were hired from among those laid off by other companies this year. Weave went on to raise an additional round of funding in 2018, but this time, Mr. Rodman says, they were smarter about it.

“It was on our terms, from people that we liked,” Mr. Rodman says. “The business showed that we could utilize that capital effectively. But each time we raised, it was, ‘we will get to cash flow break-even by this point,’ and you would see metrics that actually tell us you are going to end up there.”

Emma Penrod is a journalist based in rural Utah who covers science, technology, business and environmental health. She writes a weekly water politics newsletter at pactio.us/host/emma-penrod and Tweets about the latest science and industry news @EmaPen. When she's not writing, reading or researching, she's hunting sagebrush-scented air fresheners.

Comments (2)

  • Avatar

    Ben Paynter

    Well done, Emma. This was a great article.

    Layoffs are always hard no matter what company you are. Understanding why it happens hopefully helps ease the pain that some of those past employees might be going through.

    Keep up the good work!

    reply
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    J. Larry Bloodworth

    I always like your articles and this one is no exception. I was wondering when VCs were going to quit being Big Daddy Warbucks and start looking for a path to near-term profitability. Like We Company and others, at some point, it’s time to wake up and smell the coffee.

    reply

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