Startups balance short-term cuts and long-term growth

WeWork Tel Aviv / Photo: Shiran Carmel

Over 80% of Israeli startups say that they are planning to make salary adjustments or layoffs by the end of April.

Idan (not his real name) works in a startup with 20-30 employees. He was summoned for a talk with the company managers last week and heard the bad news - it was decided to cut the employees' salaries by 20% because of the economic situation caused by the coronavirus crisis. Idan is not the only one. Thousands of technology employees have received similar notices in the past two weeks, the employment bureaus are thronged with people, and the unemployment rate is soaring. Tech companies are also preparing for crisis and uncertainty, and some of them have chosen to deal with it through salary cuts, at least for now.

Many tech industry sources, especially investors and entrepreneurs, say that as of now, very few startups have put large-scale layoff plans into effect. At the same time, some startups have already put employees on unpaid vacation, and many of them have made across-the-board salary cuts. The situation is changing from week to week, so it is certainly likely that more drastic steps will be taken in the coming weeks.

Viola Ventures venture capital fund has been keeping track of trends in the labor market on a weekly basis. It has conducted three surveys to date among companies of various sizes showing the rapid development of trends. Two weeks ago, only 1% of companies said that they would lay employees off, but the proportion jumped to 5% a week ago. The latest figures published by Viola this week show that a third of companies have already made an initial staff cut, and a quarter of companies have adjusted salaries.

The survey also looks ahead. Over 80% of companies say that they are planning to make salary adjustments or layoffs by the end of April. What we have seen so far is only the first response of companies, and a wave of layoffs is likely to ensue in the coming weeks. The vast majority of companies, of course, has halted any hiring.

Industry sources believe that salary cuts averaging 20% are taking place in hundreds of companies, and that these amount to as much as 50% in extreme cases. In some startups, the managers' salaries have been cut by a higher percentage than the employees' salaries - 30%, according to the sources.

A small proportion of the startups sweetened the bitter pill by granting additional options to their employees in order to tighten the employees' connection to the company's future. In companies whose field of activity has been paralyzed or cut back significantly, these measures were combined.

Guesty, which has developed a platform for managing short-term properties, put 40 employees, just over 10% of its workforce, on two months of unpaid leave and cut the salaries of 40 other employees by 20%, and cut management salaries by 30%.

A heterogeneous industry with diverse problems

A large majority of startups are facing a decline in revenue - some of them because their field of activity is paralyzed (tourism, for example), but the others for two main reasons: operative problems - it is impossible to meet with people as part of the sales process and to install products - and economic problems - customers are preparing for an economic crisis, and are therefore freezing non-essential spending.

Sequoia Capital, one of the world's leading funds, published a letter to its entrepreneurs three weeks ago describing the situation as a "black swan." The fund instructed the entrepreneurs to prepare a spending plan, and for personnel, advised them, "It is worthwhile making a critical assessment of whether you can do more with less personnel, and step up productivity." The fund also warned against false optimism.

In the past two weeks, entrepreneurs and managers of Israeli (and foreign) companies have been working on adapting their plans for the coming months, with advice from investors and boards of directors.

Startups, most of which lose money, are examining their expenses structure, foreseeing their cash burn rate, and designing an appropriate spending plan for the coming year. Personnel expenses account for a substantial proportion of a company's total spending. The current crisis has also forced a substantial cut in companies' other expenses, for example on conferences, flights, and marketing expenses, so the next step is cutting employees' salaries.

The startup industry is heterogeneous, and the effect on companies varies according to their field of business and their development stage. Startups in the initial stages, most of whose activity is in development, have been less affected by the global crisis, provided, of course that they have money in the bank. On the other hand, the impact on companies with values in the hundreds of millions of dollars and unicorns (over $1 billion), which have enjoyed high values in recent years, is liable to be negative, both because their activity is more global than that of young startups, and because investors are likely to face a fall in value, and will therefore try to streamline activity.

One positive point is that startups and funds were prepared for a possible crisis, and many of them have stocked up on cash. It is a matter of timing, of course - some of them were in the midst of a financing round, or planned to start one in the coming months, and these are liable to experience difficulties. Still, it is clear that all of the startups, possibly excepting those benefiting from the crisis, will not meet their guidance for 2020.

National interest vs business interest

Nevertheless, the choice of cutting salaries or laying off employees poses a difficult dilemma. "There is a major dilemma between the national interest at the macro level, which says that it is better for the industry for salaries to fall and maintain full employment, and the interest of some of the companies, which prefer layoffs to cutting salaries," says Viola general partner Ronen Nir.

"There are development managers who prefer to avoid cutting salaries in order to avoid losing their good employees to international companies, which are still hiring. I understand the dilemma, but I think that salary cuts are sometimes preferable, because they make it possible to retain the personnel and stay in a position to take over the market when the situation improves," Nir explains.

Another concern that surfaced in our talks was that managers are putting employees on unpaid leave, instead of laying off mediocre workers. Because they wish to avoid layoffs, they mislead the employees, instead of sending them to look for another job. It should be emphasized that this is not true in all cases; there is often a need to retain employees for the future, when business activity recovers.

"Layoffs have consequences for the company and the employees' morale, says Papaya Global founder and CEO Eynat Guez, who has developed a global personnel management system. "As of now, we haven't cut salaries, because it didn't feel right for us, but we can't rule this option out. We have to support the employees and be generous, not just do optimization for the sake of the profit line."

Papaya Global recently raised $45 million, so the company has no financial crunch. "Startups need 18-36 months between financing rounds, and each of them now has to consider where it stands. Probably none of us will grow by 100% or 200% this year, the way startups like to grow. The problem is that staff are a significant expense . On the one hand, you have to cut expenses; on the other hand, you need them in order to grow," Guez says.

Jon Medved, CEO of venture capital fund OurCrowd, told "Globes," "There have been many personnel cuts, putting people on unpaid leave, and salary cuts of 10-30% in recent days. Several of our portfolio companies have begun a pivot or a slight change in their business direction. Smart companies are utilizing the crisis in order to highlight the value that they offer."

Medved sounds optimistic, and predicts that the Israeli ecosystem will overcome the crisis. "In Israel, we're better built for crises," he stresses. "Israeli companies are more financially efficient - they're able to get along on less and achieve more. Israel has enough smart capital and connections with multinational giants, which won't stop investing here in any case. Even now, you can see two-four new investments each week."

The technology industry boom in recent years also raised employees' salaries, thereby hampering the ability of startups to grow because of high salary expenses. The current salary cuts are supposed to be temporary until the crisis ends, but no one knows whether and when that will happen. According to industry sources, the cutbacks are putting salaries back to levels that they say are rational and desirable.

Published by Globes, Israel business news - - on March 29, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

WeWork Tel Aviv / Photo: Shiran Carmel
WeWork Tel Aviv / Photo: Shiran Carmel
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018