Email From Jason Calacanis: How To Handle Layoffs

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In his latest email newsletter, Mahalo CEO Jason Calacanis discusses “How To Handle Layoffs.” It is a topic he knows too well, having had to go through a layoff of 10 percent of his staff earlier today. After repeating the text of his blog post announcing the layoffs, he offers some advice for other entrepreneurs on how to do it right. The email newsletter is reprinted below in its entirety.

Update: Why this is news. There is a lot of discussion, even outrage, in the comments and elsewhere about my decision to post this email, against the express wishes of its author and his subsequent request that it be taken down.  We are not going to do that.

Like it or not, this document is news.  Its author, Jason Calacanis, is the CEO of Mahalo, which announced a layoff yesterday.  (He is also a TechCrunch partner apart from Mahalo in that we put on the TechCrunch50 conference togeher). At the time I posted this on Wednesday at 9:45 PM ET, the Mahalo layoffs were being discussed so vigorously that the topic was at the top of Techmeme.  Although Calacanis had already written a blog post on the subject, he went into much more detail about why he felt he needed to go through the layoffs and how he went about doing so in the email.  He also updated in the email how many people are still employed at Mahalo (30 full-time, 50 freelancers) in response to some reports.

The email went out to nearly 9,000 people. It was not a private email.  And Jason Calacanis is not aprivate individual. He is the CEO of a high-profile startup and an Internet celebrity in his own right.

More importantly, the email shed light on an event that had happened earlier that day and that many media outlets were reporting on and speculating about.  Here was a document from the CEO himself outlining his inner thinking on what had just happened.  It was news.

I decided to publish the it in full, unadorned because it speaks for itself.  Publishing it was no different than what we did when we recently put up Jerry Yang’s email to employees about the latest layoffs at Yahoo.  Nobody complained when we published Jerry Yang’s email.  Nobody thought it unusual for the Wall Street Journal to publish in full then-Yahoo SVP Brad Garlinghouse’s internal  “Peanut Butter Manifesto” outlining the problms at Yahoo a couple years ago.   News organizations big and small publish documents that come across their desks all the time. It is part of our job of informing our readers about events in the world.

There is no copyright issue here and there is no issue of me personally breaching an agreement.  Nothing is off the record unless a reporter agrees that it is off the record prior to receiving information. I made no such agreement and Calacanis cannot unilaterally impose such restrictions simply by writing “Do Not Reprint” at the top of his email.  Although I respect his desire in general to control who sees his email newsletters, in this case the news value of the document outweighs his personal wishes.

Beyond the layoffs at Mahalo, which are tiny in the grand scheme of things (six people), the email speaks to something that is happening across the startup economy. Every startup CEO is at least thinking about the need to cut back right now, if not going through the same ordeal that Calacanis had to go through. Others can learn from his experience.  He actually has some good advice. Read the email.  The fact that he was able to minimize the number of layoffs to only six people and how he did that is far more interesting than whether or not TechCrunch should have published the email in the first place.


Location: Mahalo HQ, Santa Monica, CA
Wednesday, October 22nd, 6:10PM PST.
Word Count: 3,381
Jason’s List Subscriber Count: 8,889
List management: http://tinyurl.com/jasonslist
Message type: Startups
Forwarding instructions: startups, VCs
Republishing: PLEASE DO NOT REPRINT
———————–

Given the challenging economic environment, we’ve decided to make some pre-preemptive cuts at Mahalo.

Although we’ve got a significant amount of cash on hand and the business is ahead of schedule in terms of traffic (4m uniques a month, double where we thought we would be at this point), we’re fairly certain that the advertising climate for the next two years will be severely depressed. To ignore this obvious fact would be irresponsible.

We’ve laid off a just under 10% of our full-time staff, cut our overhead by doing smart things like renting desks (we have six desks/offices available fyi), and reorganized our editorial department to focus on freelance positions over in-house editors. The net result of the effort is we are giving Mahalo another year of “dry powder” (or runway) to complete our mission.

We can now operate past 2012 even if we never make any advertising revenue, and truth be told, building advertising-based companies is my specialty (the last two, Silicon Alley Reporter and Weblogs, Inc. each broke 10m a year revenue between their third and fourth years). Perhaps we’re being too conservative, but I’ve rarely heard of companies that went out of business because they made cuts too early, and I’ve heard of many who have reported the opposite.

As the CEO of the company, the responsibility for these cuts is mine and mine alone. Obviously, I did anticipate that the market would correct and that is why we raised $20 million over two rounds of funding before we launched. That move ensures that Mahalo will be able to get to profitability and ride through what is sure to be a very deep and painful recession.

While I anticipated and prepared for the ‘internet winter’ we’re now facing (you’ve read my posts and e-mails about the startup depression, I’m sure), I failed to realize how bad the situation would get. It’s much worse than I thought it would be, and ignoring market conditions today would only mean deeper cuts down the road.

It’s my responsibility to make this hard decision, and I don’t take it lightly. To the people impacted, I’m very sorry that I wasn’t able to anticipate this better. It’s my fault and I’m sorry that you’ve got to bear the burden of my inability to better prepare.

Update: We still have 30 full-time folks in our office and 50+ full-time freelancers–so the reports of us cutting 1/3rd of our staff and having only 10 people are incorrect (gossip bloggers incorrect…what?!?!).

How we handled it
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Since many firms are rightsizing–or considering rightsizing–their operations now, I thought I’d try to explain how we handled the issue at Mahalo as openly as possible. Additionally, I thought I would go into how I handled it at my first company, Silicon Alley Reporter, where we cut our staff from 70 to 15 people over the course a long, painful year. My hope is that by getting into some of these details, I can share what I’ve learned about this painful process, and that you might be able to give me feedback on how we did and what we could do better.

The timing of the economic downturn and the need for these layoffs could not have come at a worse time for me. As many of you know, I’ve been out of the country for over two weeks visiting Athens, London and Seoul. We did 90% of reorganization while I was, quite literally, traveling around the world.

Speed
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The most important thing to realize in a situation like we’re facing is that, chances are, you cannot act too quickly, but you can easily act too slowly. For this reason, I decided that we had to come up with, and execute on, a cost-savings plan within two weeks. There is little upside in pushing out hard decisions like this slowly because of the simple fact that you’re burning gas while you’re deciding.

If you’re going to make cuts, set a time table based on analysis, strategy, debate and execution. For this process, I gave us about five days to analyze our situation and five days to develop a plan–there was some overlap obviously. We spent two days debating the right strategy and we executed the majority of the plan yesterday.

Again, there are four steps: analysis, strategy, debate and execution.

Emotion
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The six worst days of my professional career, on an emotional basis, were the four days I laid people off at Silicon Alley Reporter, the day I switched the name of Silicon Alley Reporter to VentureReporter, and yesterday when we did our layoffs/reorganization at Mahalo. There is nothing worse than looking into the eyes of the team that you’ve cultivated, challenged, pushed, and won and lost with, and having to tell them that they have been cut from the team. I’m sure this is how the coach of a sports team feels like at the end of training camp when many times they have to let go of great people who’ve done amazing work, but due to circumstances, they can’t keep them on the team.

It’s emotional, it’s personal, and it sucks. I’m not one to get depressed, but I would be lying if I told you that I haven’t been depressed about having to do these layoffs. While emotion is great when you’re in the heat of competition, it really doesn’t help that much when you’re doing strategy work. As such, you need to get the members of your management team to agree that you’re going to pursue your very difficult job with as little emotion as possible. If it helps, pretend you’re an outside consultant and you’ve been given the task to “save the company” with these cuts–because that’s not far off from the truth.

In other words, try and detach yourself from the emotion of the situation so you can make the right decisions. You’re going to have to tap into that emotional stuff later anyway–conserve it during your analysis and strategy.

Analysis: Assessing where you’re at and setting a goal
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The first step was getting out our P&L and looking at each line item in detail. For our business, we have a large editorial group, a modest technology team, almost no marketing costs except for our Mahalo Daily video show, and extremely tight overhead. We haven’t built our sales group yet, so that line item doesn’t exist. We do have some modest Google Adsense revenue which we have been testing for the past couple of months.

We had exactly three years of capital in the bank when we started this process, and while that is 2-10x the runway of most startups, I set the goal for the company to reach four years of runway. Absurd? Too conservative? Perhaps, but I’d rather be conservative until I know what exactly is going on in the market.

In order to get there, we needed to do some combination of cutting costs and increasing our revenue.

The goal was now set: four years of runway.

Analysis Part Two: Line by lining your P&L
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It was fairly clear in looking at our budget that we were spending two editorial dollars for every technology dollar. Our focus on editorial is what got us to four million unique visitors a month, and a nice loyal base of users at Mahalo.com, but the truth is we’ve been underspending on technology. This made it very clear to us that we had to cut the editorial spending as much as possible while maintaining the editorial integrity of our product.

The truth is that the massive editorial we’re building wasn’t getting us the bang for the buck that our technology was at *this* moment. At different points, investment in technology, editorial, or marketing can grow your business and it’s important to not get locked into a specific amount of spending on any one of those items. However, when you have venture capital–and a large amount of it–you can avoid the issue. This is the unhealthy truth about having outside investment: it distances you from the truth.

As a venture-backed entrepreneur, you have to be able see through the fog of millions of dollars of investment in order to find your way sometimes.

Question every dollar you’re spending and ask yourself: “Is there a better use for this dollar?”

When we “peeled back the onion” of our editorial spending, it became very clear that our most efficient work force was not the group of editors we had in our office, nor the remote workers we have in Manila (doing data entry type work), but rather the $10-12 an hour “remote guides” we have working from home. These editors cost us, all in, less than half of the folks in our office due to things like overhead, benefits, lunch, and equipment. The workers in Manila are half the cost of our “remote guides,” but they are 1/2 to 1/4 as effective (depending on the task).

This should have been more obvious to me since we pioneered the work-from-home model at Weblogs, Inc., where we had 300 bloggers working from home with only three or four people managing them–a 75 to one ratio (Judith Meskill actually managed 150 at one point herself God love her!).

Of course, when you’ve got a lot of venture capital and you want to grow fast, sometimes you give up on the most efficient model for a model that goes faster. That makes logical sense: overspend to take marketshare. Having people in the office was more costly, but it did get us to over four million users a month and 100,000 pages built. When folks pull up a list of “future search companies,” we’re always number one on the list because of this investment in content. So, it was well worth it.

In phase two of the company–and given the economy–we had to rethink our strategy.

Next we looked at our Mahalo Daily video show and realized that we were actually covering about 25% of the costs. Not too shabby, but not enough to justify a project that is not core. Since it is getting over two million views a month–25 million a year–it would be a shame to stop doing it. We asked ourselves how do we get this closer to break-even? It became fairly clear that cutting some costs here and getting closer to break-even–say to 50-70%–would be a good idea. As such, we moved the video editors from full-time to contract basis. Problem solved.

Strategy Part One: The obvious stuff (i.e. office space)
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The most obvious things we found on our P&L were operational things regarding our facility: office space, phones, servers, etc. We swapped our communication systems out and saved $1.5k a month, we rented out a bunch of space, we cleared out some other offices to rent them, and we cut down on non-essential travel (think: my never-ending speaking gigs). The saving here was solid so we moved on to the hard stuff referred to coldly as “human capital” by accountants. People.

Strategy Part Two: The hard stuff (i.e. people)
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The editorial analysis above gave us a clear area where we could save a lot of money: by moving aggressively to a freelance, work-from-home workforce. This also gave us a fairly good idea of how to handle our layoffs and cuts: try to do a reorganization where we shifted our full-time editors at our office to work at home freelancers. Instead of simply laying off a bunch of our editors we could offer them the ability to work from home as consultants.

The good news? Most of the editors took this offer to become freelancers, and in fact many of them seemed to have preferred it. Some were justifiably not happy with it.

In life, sometimes you have to learn things two or three times. One thing I’ve learned two or three times now is that writers, in large part, like to work from home in their pajamas with a big cup of coffee and their loved ones by their side. I know this to be true because most of my e-mails to you guys come when I’m sitting in the garden with my laptop, a cup of joe, and Taurus and Fondue curled up at my feet.

Must. Learn. To. Learn. From. My. Learnings.

Strategy Part Three: Revenues
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We immediately started running more aggressive Google Adsense, and we doubled our revenue. Great for the bottom line, not great for user experience. We’ll keep thinking that one through obviously. Additionally, I’m personally working on five content-partnership type deals that will drive revenue. If we land one of them, we’ll cut 10% of our burn–I’m sure I can close at least one or two of them by the end of the year.

Bottom line: We’re getting focused on revenues a little earlier than we thought we would, and that’s never a bad thing in my mind. However, our goal is to build a service that has 7-10m unique visitors a month. We don’t want to get to break-even and stay for 4m for ever. That’s a nice business, but we want to build an EPIC business.

Debate
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This past weekend, the day after I got back from my trip, I had my management team over to discuss what strategy we would execute. It didn’t help that I was massively jet-lagged, but we got through it. We discussed cuts and what the company would look like after the reorganization. We decided to do the cuts at the end of the week, but after making that agreement, I decided we would do them on Tuesday in order to avoid it leaking and in order to get the company focused on the product roadmap again.

The fact is, too much debate is probably not going to help. As the leader of the organization, you can take all the information in and make a quick decision. If you cut too deep, you can hire folks back, and given the economy, it’s better you secure your company’s survival right now and think about scaling up when the market gives you some signs of hitting a bottom. There is no sign of a bottom right now–despite what the clowns on CNBC might say.

The bottom is when Google and Apple miss a quarter and/or lay people off.

The bottom is when unemployment numbers go down and consumer confidence comes up (not the other way around).

The bottom is when the massive wave of variable, ARM mortgages come up in 2009.

Execution
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Having done layoffs four other times there are specific mistakes I’ve made and lessons I’ve learned. They are:

1. Don’t spread layoffs over multiple rounds: This is a horrible idea because it creates massive fear and uncertainty inside of your organization. If you’re going to do layoffs, do them once, do them quickly, and explain to people that you’re doing just that. At Silicon Alley Reporter, I cut and waited for revenue to come back–it didn’t. So I cut some more and waited some more. Nothing. I did this four times and it created an environment of constant depression and fear inside the company. If I had more experience back then (I was only 29 years old), I would have looked at the 500k in revenue and said “we’re going down to 10 people and we’ll build back up as the market allows us.”

2. Don’t lay people off one at a time, do it as a group. When I did layoffs at Silicon Alley Reporter the first time, I brought people in one at a time thinking it would be more humane. I thought I’d give folks more one-on-one time. The result was that folks were waiting at their desks and talking to people on IM the whole time waiting for their call to come into my office. It’s best to ask all the affected people–and the folks not affected–to come into the room at the same time. Explain what’s happening–that you’re having layoffs or reorganizing–and let the folks who are not affected leave.

3. Don’t sugar coat it: You need to be 100% honest and up front with people about why you’re doing it and what your decision was based on (i.e. how you decided who to keep and why, what cuts you made and why, etc). Give folks as much time as possible to discuss the issues together as this is going to be very emotional and brutal for everyone involved–including you.

4. Cutting salaries over headcount is *generally* not a good idea: If you cut people’s salaries 10% across the board, everyone in the organization gets really pissed off because they either can’t cover their bills or they have to downsize their lives. You then have your best folks looking for jobs and the folks who can’t find jobs staying at the company. You just lowered your effectiveness and that sucks. It’s much better to layoff the folks you need to and keep the folks you have happy and focused on completing the mission. There are a few exceptions to this, including sales people and senior management. If you’re going to face a radically different market, you might need to reboot your comp plan for sales for everyone to feel good about it.

5. Be as generous as you can: Give severance even though you don’t have to. Vest as much extra stock as you can even though you don’t have to. Offer freelance work to as many folks as you can. Offer to give amazing references to everyone on the team and to introduce them to as many potential employers as you can. If you think there is a chance that you’ll have open positions available again at some point, offer them to people.

6. Don’t drag it out: It’s better to do these type of things at the end of the day, and if folks are done with their questions, let folks leave. Folks have families and a lot of issues to deal with, and there is no need to keep them around for the entire day or for a couple of more days. The folks who are left can clean up the loose ends.

7. Get everyone focused again: After the layoffs, you have to make sure everyone understands what the goals are–even if they haven’t changed–and get folks ready to kill it again. You can’t expect folks to not be in some form of shock for a bit, but you have explain to them that the reality is that the company must march on and complete its destiny. It gets easier over time.

Wrapping up
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Frankly, I was wondering if I should even write this e-mail. It’s very personal and hard to do these things, and since I’ve done it so many times, I’m thinking these insights might be helpful to you, my loyal friends.

In related news, it’s interesting to watch the negativity and obnoxiousness of some bloggers and anonymous commenters while these layoffs have been going on. You would think that during times of hardship, folks would attempt to take the high-road and be supportive of each other. It’s amazing to me how on blogs people just lose their empathy. Almost everyone is going to be suffering during this historic time and it’s best, as a group, to support each other.

I’m so glad I moved to this cozy e-mail conversation with all of you guys. :-)

The technology industry is a small community, I’ve learned, and when things go bad you can really tell what people are made of. Some folks are incredibly supportive while others take the opportunity to slam folks. Being an entrepreneur–creating something from nothing–is one of the hardest things a person can do. If folks are out there trying they deserve our support.

Be good to each other.

Note: Please feel free to forward this to folks you think it would help, but please don’t republish this on the web. Note: If you want to subscribe to my email list you can do so at
http://www.tinyurl.com/jasonslist
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