It’s not every day you get to interview the former CEO of a publicly traded company, and it’s definitely not every day that this CEO was also the CEO of the company that laid you off from your job.
This is one of those days.
With today’s realities of COVID and small businesses hurting across the world, I knew I needed to get a bigger perspective on layoffs and doing them well, managing cashflow and shoring up your revenue so you can survive the rainy seasons, and finally leading well through a crisis.
So I reached out to Spencer Rascoff, co-founder and former CEO of Hotwire and Zillow.
In a twist for you, Spencer was CEO of Zillow when I was there and he was CEO when I got laid off from one of their brands. We’ve stayed in contact over the years and he’s sent me a few consulting leads and I’ve helped a few of his companies with SEO advice.
So in this episode, we dug into three specific things:
- Layoffs – when to do them and how to do them well
- Cash flow – what are some steps Spencer has taken in the past with his companies and those he invests in to determine cashflow/runway and how to make decision from that.
- Leading the team – how Spencer has rallied team support in the past when he’s had to make hard decisions and do layoffs?
Resources mentioned
Transcript
John Doherty:
Hello again everyone. Thank you for joining me again here on the Credo Podcast. I’m John Doherty, founder and CEO here at Credo, where we help companies find and hire great digital marketing firms. Today I have a very, very special guest, actually an old boss’s boss of mine from Zillow. So today I am joined by Spencer Rascoff. Spencer, if you don’t know him, he’s one of the smartest people that I know. One of the people I’ve had the pleasure of working for in the past. Co-founder of Hotwire, Zillow. He served as Zillow CEO for 10 years. And I just read today, I knew a lot of this history, but led them through the 2011 IPO. Led them through, what, 15 acquisitions, Spencer, or something like that? I think that’s what Wikipedia told me.
Spencer Rascoff:
Yup.
John Doherty:
So a lot of acquisitions, he’s got a lot of experience, now based in Los Angeles. Founded a couple of startups there and doing a lot of angel investing. And so I invited Spencer on, and I asked Spencer if he would come on because we’re dealing with all the COVID stuff going on in the world now. Spencer has a lot of experience leading through crisis times. Both peacetime CEO and wartime CEO, as Ben Horowitz from Andreessen Horowitz calls it.
John Doherty:
And so today we’re going to be talking about three specific things. Number one, we’re going to be talking about layoffs, unfortunately. How to do them well, how to think about doing them well and Spencer’s advice having gone through it both with Hotwire and Zillow. Cashflow, so steps that they’ve taken in the past to determine runway cashflow, shoring that up and making sure the business can continue. And then number three, how do you lead the team? So people obviously is the hardest part of leading a company, as I’ve learned the hard way over the last few years. And so again, I’ll ask Spencer for his take on that.
John Doherty:
So Spencer, first of all, thank you. Thank you for being here. I really appreciate you taking the time.
Spencer Rascoff:
Thanks, John. My pleasure. Happy to be here. Good speaking with you.
John Doherty:
Awesome. You as well. It’s been a long time since we caught up.
So today, as I said, the first thing I wanted to talk about is layoffs. It’s something no one wants to talk about. You recently had a piece on one of your new companies, dot.LA, based out of Los Angeles, obviously, talking about the tech world. And so one of the things you talked about in there is cutting deep, and cutting deep from the start, and only doing it once. So if you’re talking to, or when you’re talking now, I assume you’re talking to a lot of CEOs and leaders that they’re thinking about layoffs, how do you advise them to think about them, when to do them, and how to do them well?
Spencer Rascoff:
So my typical advice is you want to cut once so you don’t have to do multiple layoffs, because the drip, drip of continual retraction and continual layoffs is what really kills a company’s culture. The challenge with coronavirus as compared with other sort of normal layoff situations is the uncertainty and the unknown of it all. So it’s very hard to know … “Okay, I get it, Spencer. I want to take your advice. I want to cut once, but I don’t know how deep that needs to be, because I don’t know how long this is going to last. I don’t know what life is going to look like on the other side.”
Spencer Rascoff:
So I would recommend that you try to follow this advice as much as possible, but I recognize that it’s super hard in the face of huge uncertainty in this particular crisis. But try to cut, we’ll do one round of layoffs, one round of cutting so that you can credibly say to the survivors, the people that are there afterwards, “Look, we think that was it. We think your job is safe.”
Spencer Rascoff:
I did that in Zillow in 2008 after the financial crisis. We did that at Hotwire in 2001 after 9/11 and I’ve been involved in other companies that have gone through this. If you can just do it once and say you’re only doing it once that counts for a lot.
Spencer Rascoff:
I think other pieces of advice that are sort of related to that, related to how I’d handle layoffs are to try to treat the people that you’re laying off as generously as you can afford to. And that’s, of course ,the humane and ethical thing to do. But it’s also very important for the remaining employees because the remaining employees look very closely at how you treated the people that were laid off. And this always surprised me to some extent, and I think it surprises a lot of founders because in the throws of it you’re focused on figuring out whose name is going to be on the list and what are the benefits going to be and what are the severances going to be, et cetera.
Spencer Rascoff:
But it always surprises me how much the survivors look at the departed, and how that affects the employer brand in the eyes of the remaining employees. And a key part of treating the departed generously is how to think about the equity that they’ve earned as an employee. And one suggestion that I have for startups is that they look at amending the exercise period on vested options for those that have been laid off. Typically vested options have between 30 and 90 days to be exercised when you leave a company. But that’s really unfair to someone that’s been laid off, especially if their bank account has been depleted by financial calamity, like a stock market crash or a recession. And companies actually can amend the exercise period on vested options very easily. The stroke of a pen, figuratively speaking, there’s an accounting charge for it. So it’s not completely free, but it’s a non-cash charge. So it doesn’t really affect much of anything, especially if you’re a private company.
Spencer Rascoff:
For a public company, it’s a lot harder to do this. But for private venture backed companies or just private startups, it’s very, very easy. So I would recommend that startups make it a two year exercise period for those that have been laid off on their vested options.
John Doherty:
And that’s simply to give them a little bit of extra time. So if their funds had been depleted, they just lost their job. They’re not like, “Okay, now I have to buy these.” Right?
Spencer Rascoff:
Exactly.
John Doherty:
In order to keep anything I’ve just earned. It’s not like sell it if you’re at a publicly traded company.
Spencer Rascoff:
Exactly. So, number one, they have more time to have enough cash to exercise the options. Number two, they don’t have to pay the tax until the time of exercise. So even if you had a lot of cash, if you exercise the options, then you have to pay the tax on it. And that’s pretty difficult because you don’t know what the options are going to be worth some day later. And that takes me to number three, which is, it gives these employees a lot longer to see the company mature.
Spencer Rascoff:
I mean, if I told you that, you know, “Hey, do want to exercise your vested options in some startup?” They’d be like, “Oh, I don’t know. Are they going be worth anything someday?” And the answer’s, I don’t know, but maybe two years from now you will know if they’re going to be worth something.
Spencer Rascoff:
So it’s really very kind. And actually this is a perfect segue into another piece of advice that I have, which is because that amendment to an option plan is so kind to someone that’s been laid off, I think it’s pretty humane and advisable to basically ask people if they want to be laid off and you know, you say, “Hey look, we are going through this and it sucks and I’m sorry and we’re going to do a reduction in force of 30% of the head count. If you think if you want to be part of that, then this is what your severance will be and this is what will happen with your options.” And there are a lot of advantages to employee to opting into a riff rather than sticking around and then leaving six, 12, eight months later.
Spencer Rascoff:
The first is of course they get the severance, including the exercise period amendment that we just talked about. The second is there’s much less stigma to leaving as part of a riff, especially a coronavirus riff, where it’s like, yeah, of course people don’t… New employers don’t think that there’s anything wrong with you as an employee if you were part of a coronavirus riff.
John Doherty:
Right. It’s kind of a no fault lay off to an extent.
Spencer Rascoff:
Exactly. And then, furthermore for those that think this might last for a while, they might want to get ahead of it. They might be like, “Hey, I’d rather get the severance, get unemployment and get back out there on the job market.” Realizing that it’s going to take a couple of months to find something rather than wait until two or three months from now. And then leave. So it’s, it’s advantageous to the company and to the survivors and to the executive, the CEO or others, to make sure that people who are still at the company actually want to be there for all the right reasons. And so the “are you in or are you out?” conversation is something that I think is really important and we did that at Zillow for sure.
Spencer Rascoff:
I mean I remember having that conversation with people in 2008 saying, “Do you want to be part of this riff?” Some people said, “Yeah, I opt in.” We’re like, “Okay great.” That is much, much better for everyone than them staying at the company and then leaving two or three months later. That’s the worst possible thing.
John Doherty:
Absolutely. Because then you potentially could’ve laid someone else off that would’ve stayed to fill that role and then, they leave and then you just have nobody in that role and it’s maybe hiring is frozen. Yeah.
Spencer Rascoff:
They’re taking a seat on the bus. They say they’re occupying a seat and they’re disengaged. I mean, if they were somebody that was going to leave anyway two or three months later, it means that they probably aren’t long for the company anyhow. And so you’d rather just know that now and get them out and have them take the seat on the riff bus so that no one else has to take that seat.
John Doherty:
Totally. Totally. And I think what you said there at the beginning is really interesting. Really, I think, something I want to highlight about it also the way you do it also reflects back on how you are as an employer and also in the future, right? Because we’re not going to be in this forever and in the future you’re going to be hiring people again and also people that you’ve laid off are still going to be talking to people that are there. And so you want to do it as you said, in as humane of a way as possible. Giving them what you can afford, severance you can afford and potentially helping them find another job. Like all those sorts of things. I think that that’s super important.
I know even just like myself, getting laid off, people ask me how was it at Zillow. I’m like, “Zillow’s executive team are some of the best people I’ve ever worked for.” Right? And that’s just a testament to how it was done. And so I think it’s a really important thing to flag up as well because people do talk, especially in an industry like digital marketing or even just in the tech world, right? Seattle Tech, LA Tech, New York Tech, whatever. Super, super small, everybody knows everybody. And so they’re going to go and they’re going to ask people in the future.
Spencer Rascoff:
Yeah, I mean totally. That’s why, I mean the fact that I’m on your podcast. I mean, look, I was the CEO of a company that laid you off and yet I’ve referred you business. I’ve referred you candidates and you’ve done reference checks for me. We still have a very good symbiotic, professional and personal relationship in spite of that. And I think part of that is because I handled it as best I could and you were on the receiving end and handled as best you could.
Spencer Rascoff:
I remember Hotwire in 2001 after 9/11 when we did those layoffs, we went from about 200 people to about 150 and I remember about seven or eight years after that, my assistant from Hotwire saw me on the street and I hadn’t kept in touch with her at all and she was one of the people that got laid off. And I remember I saw her approaching me from across the street. I was like, “Oh God, this is going to be awkward. I laid her off seven, eight years ago. How is this going to go? Whatever.” And she was like, “Oh my God, it’s so great to see you. I just want you to know that that was the best thing that ever happened to me. It put my life and career on a totally different trajectory and it sucked at the time a little bit. But the way you handled it was as fair as possible and you treated me like an adult, et cetera. And now I went on to become a school teacher and that’s the right thing for me.” And on and on and on.
Spencer Rascoff:
And then weirdly that same week I ran into a director of product management who also had been laid off from Hotwire also seven years, seven or eight years earlier, and almost the same conversation with her. And so, this sucks, it totally… I mean, I don’t mean to make light of it by giving happy, happy stories, but handled properly and maturely and empathetically, it can go okay.
John Doherty:
Absolutely. Yeah. And that’s a common thing that I’ve heard, just talking to other people as well. And people have asked me too and I’m like, “Actually it was probably the best thing that’s ever happened to me because it made me go start my own company.” And I hear that, I’ve heard that from quite a few people that they’re like… And I remember right after I got laid off, I was talking to a bunch of agency owners and I think seven of the eight I spoke with had all been laid off. It was like, “Okay, this is…” I mean it’s like it has less of a stigma now than it used to. And especially if you’re entrepreneurial minded at all, it can actually be a really good thing and it’s a good part of your story as well.
John Doherty:
Awesome. So, the second thing that I wanted to talk about, and it kind of goes hand in hand here because you’re not going to make layoffs if you don’t really know about your cashflow, right? You haven’t seen revenue take a hit and all of that. So I was curious, and obviously we’re talking about Hotwire and Zillow. Hotwire was sold to Expedia. Was Hotwire public before it was sold to Expedia?
Spencer Rascoff:
No, no. We were getting ready to go public. We sold.
John Doherty:
Okay, so you went that way. And then obviously Expedia is public, you took Zillow public. And so obviously that’s a different kind of thing than a small digital marketing agency. But there are also some bigger companies that listen here. And so I guess I was curious, what are some of the… When you saw these things going on, I mean 9/11 hit, right? And that was kind of a Black Swan moment. It was just like all of a sudden the world was different. Kicked us into a recession. 2008 was a different thing obviously, but it ran on for a while. What are some of the steps that y’all took inside these various companies to say like, “Okay, what is the reality here? What is kind of our cash situation and then how deep to do we need to cut?” Right? Because you don’t want to cut to the bone if you don’t have to cut to the bone. Obviously if you have to, you do. But, what’d you do? How’d you go about making those decisions?
Spencer Rascoff:
I mean, the best possible scenario is to cut deeply enough that with the revenue forecast that you’re able to produce you think you have enough cash to get to profitability. So that’s the ultimate, “I only have to do this once.” I’ve cut so deep that I’m either break even now or I can see the trajectory to break even. And the problem of course is the revenue forecast that is required to do that determination. I mean-
John Doherty:
Yeah, it’s all changed.
Spencer Rascoff:
I have companies that I’m involved in that have zero revenue right now and they’re like, “Well, I don’t know. How long will that continue? If it continues for three months then I’m going to be fine. If it continues for six months, then I’m out of business. And so how much do I cut now?”
Spencer Rascoff:
So, I mean, I think… But that said, that would be the advice. Whatever you think the most likely revenue scenario is, cut enough that you’re either break even already or there’s a path to break even without a further cut and without any super optimistic revenue projections and that is what we did at Hotwire and Zillow and that’s what I’ve been advising other startups to do.
John Doherty:
And this also applies I think. I think it’s interesting to note that this doesn’t just apply to venture back startups that have raised a bunch of money and are spending to grow to get market share. This also applies to people that, say you were profitable and then this happened and you lost 50% of your revenue and now you’re unprofitable. So getting back to that profitability, so cutting to get back to profitability even if you were before, because I think a lot of people here get to profitable and they’re like, “Oh, that’s just venture back companies that are that way.” No, you could have been running a very profitable company that now factors completely out of your own control. And yeah, so it’s a combination of like where were we, where are we now, what is still coming in, and then where do we have to be in order to be cashflow positive?
Spencer Rascoff:
Yeah, and I think, this might seem like a bit of a tangent, but it’s clearly related to the cashflow question. Just a word on the PPP program. I haven’t-
John Doherty:
I was going to ask about that.
Spencer Rascoff:
… chimed in publicly on this because it’s such a hot potato and I don’t want to spend all day in a Twitter war with people, but since this is a podcast and therefore I won’t have to respond to people yelling at me all the time on Twitter. I will say that I absolutely think that startups, venture funded or not, should apply for PPP if they think they qualify. I see no moral question in this regard. I think it’s odd that some VCs are recommending against it. I’m confused by that. I think that some have questioned their motives in that regard saying, “Well maybe it’s that the VCs want… They want start ups to have to come back to them on bended knee and seek better terms from their VCs on a cram down round.” I don’t know if that’s the case or not. I suspect in some cases it is what’s happening.
Spencer Rascoff:
In other cases it’s not, but the short version is, I mean I’m involved in several startups were the founders had specifically asked me, “Hey Spencer, do you think I should apply?” Absolutely. If you think you qualify, you should apply. There was a government program created for the purpose of saving jobs and if you meet the criteria that were established for that program, you should take advantage of it in my opinion.
John Doherty:
Yeah. Yeah. I would completely agree. Actually just applied for it this morning. So, it’s just, I mean, the way I thought about it was like, well it can… We have seen a little bit of a decrease in revenue and it can pay salaries and we can also take money that we would have been using for that and put it into other things in order to come out of this thing stronger. Like there’s literally no doubt.
Spencer Rascoff:
Yeah, I mean the downside that people have cited as some reputational downside that I just don’t see, and I think there are two pieces. One is there might be some taints. It’s like, “Oh, like a Scarlet Letter.” Like you took the PPP aid and the other is an ethical question of like, “Hey, this was really developed for the corner bookstore in middle America and not for some digital marketing agency.” I don’t know if you guys have raised venture funding, but whatever. Not for some venture funded company. I just think that’s ridiculous.
Spencer Rascoff:
First of all, nobody ever questions that… Whatever we can go on and on, on this topic. But good for you, I hope you qualify. I hope you receive them. And I hope that it extends the runway for Credo by whatever, however many couple more months and allows you to invest further.
John Doherty:
Exactly. Exactly. Yeah. And, I do want to get to the… I do want to be cognizant of your time and get to the third part about leading the team because I think it’s super important and not to derail us too much, but is this a good time for people to think about raising funds if they weren’t before?
Spencer Rascoff:
I mean yes and no. I mean there’s a lot of fundraising activity happening. I will tell you that. I’m an active angel investor and I have, I don’t know, five to 10 deals that I’m actively considering at any point in time and that has not slowed down. If anything that’s increased. So there are plenty of people trying to raise money and raising money successfully right now. I think that the valuations have come down quite a bit at the later stage. And so if you’re a founder that doesn’t need to raise money right now and you’re pretty confident that your business results are solid enough that that won’t change, then purely from a valuation standpoint, it probably would behoove you to wait because investor expectations have brought valuations down. I have not seen the valuations come down at the early stage yet, which disappoints me as an early stage investor.
Spencer Rascoff:
But I mean, I think founders are like, “Oh yeah, it was a $10 million safe at a 20%, 40% discount. A $10 million cap or an $18 million cap or whatever. And we had no revenue before and we still have no revenue now.” And I’m like, “Yeah, but the world has changed. Everything’s down 25%.” They’re like, “Well, we haven’t even launched yet.” So-
John Doherty:
We’re not. Yeah, because we didn’t have anything.
Spencer Rascoff:
Yeah. And so, the fact is that there’s just enough capital still available that they can dictate those terms for the most part. So I think if you’re early stage, the valuations haven’t come down. But I guess, so the answer to your question is, is it a good time to raise money? Unbalanced, probably not because I think investors expect to see a discount, but it’s a really good time to have money in the bank, whether you’re an investor or whether you’re a startup. And so if you’re… So that might argue for raising money if you can.
John Doherty:
Yeah. The classic, it depends. Yeah, I like it. Cool. So the final thing I had to ask you about is, so in the past, after you did layoffs at Hotwire, at Zillow, and you did the “are you in, are you out” sort of conversations, all of that. After you do that, then the ones that are left, right? The people that are left, how do you then rally them around the future and rally the team support, get that “we’re all in this together” sort of mentality, like shore that up I guess. Right?
Spencer Rascoff:
Yeah. So I mean that’s the most important part of the layoffs is something that has nothing to do with the layoffs and sells the day after. And rallying the survivors is super important. You tell them you want them to reconnect to the mission, you want them to remember why they joined the company in the first place. You want to paint the big picture and the big dream for them in very clear terms. You, as a founder or CEO, want to be very transparent with them and empathetic and show the right level of emotion and sadness and disappointment for what’s happened over the last couple of weeks to their former colleagues. But also paint the right level of excitement and optimism for what lies ahead.
Spencer Rascoff:
And that’s a very hard, hard note to strike. But I think if done properly it can be very motivating. And I know that, again, the period of 2008 after Zillow did its layoffs, the period in 2001 after Hotwire did, were a period of enormous innovation and vitality and energy. Now we were there together physically. And so this is a whole new bag here in an area such as this is the thing.
Spencer Rascoff:
But I mean we got so much done at Hotwire and Zillow in that six months post layoffs. All of a sudden meetings were more efficient. Everyone was aligned on priorities. There were fewer people in every email thread because there just were fewer people. There were fewer decision makers and we were much more efficient. We worked smarter and harder and had more fun, frankly. And I think almost, I would say to the person, everybody who was there would say a year later that in retrospect the layoffs were a good thing. That in retrospect they helped make the company more fit to help them make the company more effective and efficient and were a blessing in disguise. Although it did not feel that way at the time.
John Doherty:
Yeah, yeah, yeah. I think you said even in your Dot LA piece that most companies could stand, even in the best of times, to make a 10% reduction in their workforce and they’d be totally fine. Right? And makes you, there’s fewer people in meetings, fewer desks, all that sort of stuff, other expenses go down, especially if you’re in an office together and have all these perks and that kind of thing. Yeah. And I remember hearing those stories. Yeah. Internally at Zillow, I remember, especially Stan, right? Talking about, I mean just because I mean, Zillow kind of blew up in a good way with this estimate because all of a sudden everyone’s like, “How’s my house value? How’s my neighbor’s house value?” That kind of thing. Right? So, an exciting time in a weird way there as well, as always those pluses and minuses and it’s always hard to hit that note of even in the best of times, you don’t want to oversell the optimism. You also don’t want to undersell it.
John Doherty:
And so that’s the hardest part, I find, as being a leader in both good and bad times. Well Spencer, I want to be very cognizant of your time. Thank you so much for taking the time to talk with us here. I mean as I said at the start, I very much respect you and your work and your perspective on all this. So thank you for coming on and sharing it with the audience. I greatly appreciate it and wish you well.
Spencer Rascoff:
Thank you. Good luck to everybody. Hang in there.
John Doherty:
Hey there. John Doherty here once again. Just wanted to thank you for making it all the way through this episode. If you’ve gotten value from the Credo Podcast, we’d love it if you would leave us a five star review on iTunes or wherever you listen to podcasts. This really helps us get the message out there and also if you really, really liked it, take a screenshot of your phone, share it on your Instagram stories, tag me at DohertyJFN and I’ll re-share it for you. Thank you so much for learning, for listening, and for sharing it with others.
