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With these non-IPO companies doing layoffs is the correct way to read these announcements "we are letting people go to lower expenses because we are not profita

With these non-IPO companies doing layoffs is the correct way to read these announcements "we are letting people go to lower expenses because we are not profitable and are actually at risk of running out of money" or is it more "we are letting people go to lower expenses because our investors are asking that we look better on paper because they would like us to have a liquidity exit event (acquisition, private equity, IPO)"? I suppose my larger question is if a private company is break-even/profitable would the investors/board ever ask management to make these cuts? If so, why?

datalopers 4y ago
For all companies, public or private, they need to grow their gross margins if they want to survive. The last 5-10 years was inappropriately focused on revenue and headcount growth and the tide has very abruptly shifted.
xedrac 4y ago
I suspect it has a lot to do with the rate at which companies can borrow money.
- twelve40 4y ago
  did circleci borrow any money? I know they raised $315mil, and none of the smaller companies I've ever worked for have ever borrowed anything.
  - dilyevsky 4y ago
    Corporate debt is pretty common financing mechanism
    - twelve40 4y ago
      Common with tech startups like CircleCI? really?
      - dilyevsky 4y ago
        CircleCI raised like 300M of funding and still has hundreds of employees. Not exactly a startup...
wongarsu 4y ago
All of the above. Suppose you have a company with no money, but with a bank willing to loan you money at market rate. You can do three projects, one costs $1 mil, and after a year brings you $1.5 mil in profit, the second costs $1 mil and brings $1.05 mil after a year, and the third costs $1 mil and brings $1.01 mil. In 2021 interest rates were near zero, so all three projects would have given you a profit. The worst of the bunch only $10,000, but that's still nice. So you hire people to do all of them. But now at the end of 2022 interest rates are about 4% and climbing. The loan for each project now costs $40,000, making the last project unprofitable, and the second project will only be profitable for a couple more months at best. So you cut projects 2 and 3, laying off everyone working on them. That's how a healthy company would end up with layoffs. A less healthy company might only have projects like the second and third one, and is now running around trying to improve efficiency. And some companies don't make profit at all, being afloat on the hope of eventually making some, and slowly sinking as that money becomes more and more expensive.
- notyourwork 4y ago
  Really good summary of how different economic times are handled differently at a business strategy level. It's worth noting as an engineer because risky startups 2 years ago are not carrying the same level of risk for you as an IC to contribute to today. It could be case that a startup closes doors way faster/quicker today whereas a few years back they'd continue burning cash. This is why jobs are not just a job but you are investing in a company so to speak because if the company is not successful your job may also not be needed any longer.
- twelve40 4y ago
  so you make this assumption that these companies laying off mostly fund their business with short-term bank loans? really?
  - lmeyerov 4y ago
    VC $ works out the same. 18-24mo, with an even higher burn than a bank would accept, and the assumption that you can raise a 2X+ bigger round at the end of it to pay for the previous staff + next round of hires.
thebitguru 4y ago
I don't know about CircleCI specifically, but generally, pre-IPO companies are pushed to reinvest profits in favor of aggressive/continued growth, instead of profit. Most companies intentionally overspend, but now that the investments are drying out, they are changing their posture. So, I would guess it's the former, i.e., letting people go to reduce the risk of running out of money. At the same time, depending on how the business is doing, some investors might look for exits too instead of plateau or later raising another round. So, it could be both.
tootie 4y ago
There doesn't need to be any external pressure. Companies can and do layoffs even when they're doing well. If a line of business just isn't profitable or they this they can be just as effective with fewer staff or they want to outsource headcount. Happens all the time it just doesn't get headlines.
onlyrealcuzzo 4y ago
A down-round is basically death for a startup. The easiest way to avoid a down-round is to layoff a big portion of your company, and hope investors believe it won't impact your future revenue. Unless we get back to ZIRP, pretty much every startup in existence is going to down-round on their next raise.

datalopers 4y ago

For all companies, public or private, they need to grow their gross margins if they want to survive. The last 5-10 years was inappropriately focused on revenue and headcount growth and the tide has very abruptly shifted.

xedrac 4y ago

I suspect it has a lot to do with the rate at which companies can borrow money.

twelve40 4y ago
did circleci borrow any money? I know they raised $315mil, and none of the smaller companies I've ever worked for have ever borrowed anything.
- dilyevsky 4y ago
  Corporate debt is pretty common financing mechanism
  - twelve40 4y ago
    Common with tech startups like CircleCI? really?
    - dilyevsky 4y ago
      CircleCI raised like 300M of funding and still has hundreds of employees. Not exactly a startup...

wongarsu 4y ago

All of the above. Suppose you have a company with no money, but with a bank willing to loan you money at market rate. You can do three projects, one costs $1 mil, and after a year brings you $1.5 mil in profit, the second costs $1 mil and brings $1.05 mil after a year, and the third costs $1 mil and brings $1.01 mil. In 2021 interest rates were near zero, so all three projects would have given you a profit. The worst of the bunch only $10,000, but that's still nice. So you hire people to do all of them. But now at the end of 2022 interest rates are about 4% and climbing. The loan for each project now costs $40,000, making the last project unprofitable, and the second project will only be profitable for a couple more months at best. So you cut projects 2 and 3, laying off everyone working on them. That's how a healthy company would end up with layoffs. A less healthy company might only have projects like the second and third one, and is now running around trying to improve efficiency. And some companies don't make profit at all, being afloat on the hope of eventually making some, and slowly sinking as that money becomes more and more expensive.

notyourwork 4y ago
Really good summary of how different economic times are handled differently at a business strategy level. It's worth noting as an engineer because risky startups 2 years ago are not carrying the same level of risk for you as an IC to contribute to today. It could be case that a startup closes doors way faster/quicker today whereas a few years back they'd continue burning cash. This is why jobs are not just a job but you are investing in a company so to speak because if the company is not successful your job may also not be needed any longer.
twelve40 4y ago
so you make this assumption that these companies laying off mostly fund their business with short-term bank loans? really?
- lmeyerov 4y ago
  VC $ works out the same. 18-24mo, with an even higher burn than a bank would accept, and the assumption that you can raise a 2X+ bigger round at the end of it to pay for the previous staff + next round of hires.

thebitguru 4y ago

I don't know about CircleCI specifically, but generally, pre-IPO companies are pushed to reinvest profits in favor of aggressive/continued growth, instead of profit. Most companies intentionally overspend, but now that the investments are drying out, they are changing their posture. So, I would guess it's the former, i.e., letting people go to reduce the risk of running out of money. At the same time, depending on how the business is doing, some investors might look for exits too instead of plateau or later raising another round. So, it could be both.

tootie 4y ago

There doesn't need to be any external pressure. Companies can and do layoffs even when they're doing well. If a line of business just isn't profitable or they this they can be just as effective with fewer staff or they want to outsource headcount. Happens all the time it just doesn't get headlines.

onlyrealcuzzo 4y ago

A down-round is basically death for a startup. The easiest way to avoid a down-round is to layoff a big portion of your company, and hope investors believe it won't impact your future revenue. Unless we get back to ZIRP, pretty much every startup in existence is going to down-round on their next raise.