Revel’s employees had shares that ended up being nothing more than pieces of paper. That comes after $120M of outside investment and a nominal valuation of half a billion dollars. Such is life when you ride the thin edge of aggressive growth and outside institutional investment. Yet we’re not convinced there won’t be similar endings to other venture-backed companies in brick and mortar, which is why employees at such firms need to pay particular attention to what we say next.
Let’s start by looking at some outside resources. Sammy Abdullah, an investor at Blossom Street Ventures, has great metrics for how software companies should perform. We’re going to borrow from some of his analysis in this post.
We’ll start by saying this:
It’s your job as an employee to understand how your company is spending money. How much are they burning? How much are they spending on R&D (engineering), and how much on Sales and Marketing (S&M)?
Sammy notes that earlier stage companies will start with R&D spend at about 40% of sales but end up with R&D closer to 20% as the company gets ready to exit. Unsurprisingly this is because engineers are expensive, and even a junior engineer in the Bay Area will cost you $200,000 a year fully loaded (which is why people are rightfully questioning the staying power of the Valley as the country’s innovation hub).
There’s also another secret to engineering: it’s very scalable. Once a product has built the requisite number of features ongoing support takes a fraction of the bodies. So don’t be surprised if you’ve been hired to mature features on a product like POS only to discover that you’re being cut six months later when one engineer can keep up with maintenance.
The same dynamics that work in engineering also work in sales. In the early stages S&M gets a lot of attention as the company needs to grow revenue. Think how low the price for POS has gotten as venture-backed POS companies use a marketing fund to subsidize the upfront cost of switching systems. In order to show high levels of growth a large pool of capital is allocated to S&M. As the brand grows, customer acquisition costs come down. New, potential customers start searching for your brand online and before you know it you’re able to grow sales without adding bodies. That’s when the axe falls for S&M as well.
Of course G&A (back office folks) are also at risk when companies take this much capital and don’t hit numbers. Do you think you need as many HR, clerical, and legal people when you’re shedding employees? And any sort of market hiccup is felt even more strongly when you’re reliant on outside dollars to pay the bills.
Ask questions and find the truth. If a company isn’t willing to be this transparent with its employees, what are they hiding from their customers?
Add comment