The HotelTonight CEO shares how his team and he turned the business around in its pursuit of profitability
5 Jun, 2017FIRSTROUND.COM
It’s been nearly a year and a half, but I remember it like yesterday. Every founder recalls that moment: the first time you announce a company-altering decision, one that — until that second — had mostly been taking shape in your head.
For me, it was a Monday in October, in front of the executive team of HotelTonight. Or rather Sunday night, as I hadn't slept at all the night before.
For five years, the company had been grinding away to drive high growth rates. I had spent the summer trying to raise our next round of funding. It was as if every VC spoke from the same script: “Your growth is good, but damn, your burn is astronomical.” With a monthly burn of $2.5 million, our fundraising seemed destined to end in a deal with really awful terms.
It was time to deliver the news to the executive team. I'd practiced many times before, but my voice cracked as I started to tell them that we were changing course. Instead of raising our Series E, we were going to become profitable with the resources we had in the bank.
I’m lucky to work with a great team. They didn’t waste time commiserating — they rose to the challenge. Instead of focusing solely on growth, we charted a path to profitability. Looking back, it was the ultimate test of the resilience of our culture and brand. We went from burning $30 million a year to owning our destiny — in seven months. In the hopes it will help another company nearing this inflection point, let me share the four steps we took to get there.
Reevaluating your expense base is your first and most critical task if you want to reach profitability. For many companies — especially those in technology — the greatest expense is personnel. To get to profitability, focus on the highest impact area. That means you'll likely have to make cuts. Don’t expect changes to personnel to close the gap completely, but it’s an unfortunate, yet often necessary step in the path to getting your company out of the red.
No matter if you call it a layoff or reduction in force, letting go of team members is the most difficult and dramatic part of the process. It’s incredibly hard, which is why you must start with it.
If you decide it’s necessary, reach out to as many advisors, investors and mentors as you need — prioritize the current and past CEOs who have had to make tough calls to save their companies. Ask for their advice and write it down.
Before layoffs, build your reserves. You need to be the most resilient person in the room. Your people have never needed you more than now.
But then do it. The very best advice I received? Make the changes right away. Your people have never needed you more than they do now — their livelihoods are at stake. If they will be let go, they need to start finding their next role as soon as possible. If they stay, they need to digest the news, reconvene and gear up to dig in with a leaner team. In either case, waiting a longer time doesn’t help. It’s human nature to want to postpone layoffs even a week or two, but don’t do it. The decision only becomes heavier and more crippling to carry.
Here are other hard-won lessons I’d offer to founders facing this stage:
Do layoffs only once. People can accept and recover from a company restructuring. The moment you hint at a second one they’ll fear — and expect — the third, fourth, and fifth. They’ll disengage and start looking for jobs. They’ll lose trust in your leadership, intentions and vision.
Go out of your way to accommodate. Treat people who are leaving — and those who are staying — with the highest respect. It’s your duty to do right by them, such as helping them network to find a new job or meeting them for coffee to give them advice.
How you treat the team members who are leaving sends a strong message to those who are staying. There were specific gestures we proactively made — such as paying people through the holidays — that were important to our team and representative of our values. We made sure to fulfill them.
Don’t make it about you. Never say ‘This is really hard for me’ — you’ll be tempted to when the conversation gets emotional. It’s natural to want to empathize, but they’re hurting way more than you.
Take ownership — don’t blame it on the board or anyone else. This is all on you. It’s your fault that this happened.
Call Your Profitability Play
After you have conversations with those who are departing, there will be a void. Not only for you, but especially for the team that remains and has watched colleagues leave. It’s important that you honor the contributions of everyone who has gotten the company to this point. But soon after, you need to share a next step. A compelling plan is as critical at this juncture as the compassion you show to those who have left the company.
Call your profitability play. Here are the key steps to execute to clear the way for it:
Assemble the new team immediately. Narrow the window between speaking with your departing team members and addressing the new, leaner company to inform them what’s going on. The faster you can convene everyone, the less panic will ensue. Consider finishing layoff conversations right before a regularly scheduled team meeting, so you can easily assemble those who you’ve asked to stay with you.
Ditch the slides. This is not a board presentation. Be open, honest and vulnerable speaking with your team. The first thing you need to do is take full responsibility for growing too quickly, in terms of budgets, hiring and expansion. Take ownership that this is no one’s fault but yours. Tell your team that, all things considered, you cannot continue to operate in the current way. Your team’s faith in you is riding on your ability to frame this moment as a new beginning.
Stretch out a safety net. Let people know that you will make only one round of layoffs — what has just happened is it. Answer any questions until that sinks in for them. Their next doubt will be about the health of the company. Be extremely clear that the organization is safe and that you have all the funding you need to reach profitability, but that everyone will need to be on the same page to decrease burn rate. To drive home this point, I told the team our exact and current numbers: what we had in the bank, our funding, our burn rate and how these factors affect our path to profitability.
Spotlight highlights and accomplishments. At HotelTonight, travelers and hotels were using our service more than ever, which was a helpful way to drive momentum at an otherwise difficult time. Share any recent milestones you’ve hit, like record number of orders or new customers. Harness recent achievements to help fuel the new plan.
Stay a step ahead of the tough questions. People may be too confused or fearful to ask questions in the moment. In advance of the All Hands, brainstorm a list of the most likely questions with your executive team. Rehearse the answers and give them before you open it up to questions. That’ll not only provide valuable information, but help signal to the team that you have been thoughtful in the process.
Now’s the time to call your profitability play. Your plan to profitability is as strong as it is simple for your people to understand and orient themselves to it. For us, that meant boiling our goal down to two metrics: growth and profitability. Here’s what that meant for us:
Growth, in most simple terms, is how much a company grows year over year. For us, that meant gross booking value (GBV).
Profitability, for us, meant that we were self-sufficient. That’s it. There’s not a lot of nuance to it. We could operate on our own income, and without an infusion of cash.
Put in these simple terms, our team really rallied behind the idea that we could better control our own future. But that’s not enough — you’ve got to paint the picture for them. I told our team that I could see us sitting in our “lounge” meeting room, perhaps only a few quarters from that day, celebrating hitting profitability. We’d have a record number of customers and hotel partners — maybe even a growing team. I told them that the result would be because each person made a meaningful, tangible and unique contribution to help the company get there.
Calling your profitability play is only the first leg of the race. You must be present to reassure everyone that the company is strong and in a position to succeed. As a leader, that entails strict time management and visibility — even more than usual. Be hyper conscious of how you’re spending your time and reevaluate your schedule to find more ways that you can be actively involved in the day-to-day. Here’s are a few of the personal rules I made for myself:
Account for every minute. The same month I made the announcement of our drive to profitability, I decided to monitor how I spent every minute of every day. My goal was to be more proactive with my time. I noticed that, in one week, I spent 80% of my days in external meetings. That was not the right balance for me. Instead, I wanted to make myself more available to teams, especially the Product. I actively scheduled 15% of my time to spend with Product and 25% to be available for people to meet with me.
Be visible and available. As we all worked to profitability, I wanted to be easily accessible. In that open “office hours” — 25% of my time — I didn’t want to be hard to find. I worked in open spaces. If no one came to me, I’d join meetings I didn’t normally participate in and listen. I scheduled additional 1:1s with managers and committed to help them be present to help motivate their teams.
Host regular all-access sessions. We changed our monthly All Hands so I could lead them. We ended the session with an AMA where team members could ask me any questions. From finances to features to future plans, nothing was off-limits. Our AMAs were particularly influential during the seven-month march to profitability. The team’s questions spurred constructive dialogue and led to the development of creative features and initiatives that increased our revenue while decreasing our burn. It’s a tradition we continue to this day.
On the path to profitability, be present. Be the first person to arrive or the last person to leave the office.
There are also a few tenets that came in handy to help us move, as a company, to profitability:
Bow to EBITDA. If your one goal is to be profitable, EBITDA is your compass. In short, that’s net income minus your non-cash expenses and your cash burn. With this as the goal, decision-making becomes exceptionally straightforward: every decision you make must be based on EBITDA impact. It was fine to track other KPIs, but every metric and tactic was evaluated and prioritized by its impact on EBITDA. Here were the formulas that guided us:
GROW THIS: [Transactions * Basket size * Margin]
SHRINK THIS: [Fixed Expenses + Variable Expenses]
OPTIMIZE THIS: [Marketing ROI]
Each of these variables may seem abstract on its own, so here are two examples to illustrate how we moved the levers that affected EBITDA:
Reduce reliance on couponing. For years, we incentivized customers to book hotel stays with a lot of coupons. We realized this wasn’t driving the correct behavior — and dramatically decreased our margins. All of this lessened our chance of reaching profitability. We pulled back on discounts. The product needed to speak for itself.
Transfer our infrastructure. Most adjustments to fixed expenses are one-time, but can be impactful. For example, our CTO and dev team improved code related to our integration with Amazon Web Services and saved $500,000 a year.
Put everything under the EBITDA microscope. Anything is fair game. Be prepared to disassemble your previous plans and processes. The faster they are rebuilt the sooner you can reduce your burn.
Budget with 90% conviction. Whether it’s the CEO reviewing the company’s budget with the CFO or manager revising a team’s budget, only approve a financial plan if you have 90% conviction that it’ll get you to profitability. Reject any plan that doesn’t. This isn’t the phase to gamble on unproven assumptions. Design your plan so your team can can visibly see how pulling your EBITDA levers moves you closer to your goals.
Reduce KPIs to a color. To get to profitability, we ran detailed daily, weekly and monthly data reports of EBITDA and other KPIs. We used Looker to deliver a company-wide email detailing each of the key metrics we were measuring. This scorecard would highlight progress toward our monthly metrics. If the numbers were green, it indicated that we we’re hitting our goals. We all saw the reports and talked about them often — I know it contributed to them owning it. Everyone wanted to see a string of green numbers on the scorecard.
Profitability is a bright, green line — we kept our eyes on it. Every decision was a step in its direction.
Let Success Compound
You may wonder who’d disagree with this tactic but — after a revamp of the team, a new focus on specific metrics and a vigilance to not backslide — it’s easy for leaders to hold onto the reins too tightly. I was surprised that within a week of calling the profitability play, our team completely readjusted their mindset. They jumped into work as if to say: “Screw what happened before. We’re putting that behind us. It’s time to build.” Before I knew it, teams were pursuing new projects to get us back on track. I had a choice to actively manage those plans, or set the parameters and let them loose. I’m glad I chose the later, because here’s what I learned:
Give parameters, not permission. You’ll be amazed by each person’s ability to respond to the challenge, blow past targets and dig into resourceful solutions. Brian Han, our Head of User Acquisition, launched a new partnership that turbocharged our bookings. He understood and was on track with our profitability plan, so asking me for permission would’ve wasted time and slowed down the process. Give your team the freedom and space to innovate — and execute.
Default to durability. As a leader, if you’re visible and available during these march to profitability, then let your team attack their plans in their own way — regardless of the fervor. I remember one team that worked harder, more efficiently and productive than ever before. I saw them come in on holiday weekends and brainstorm new features while running on adjacent treadmills training for a half-marathon that we’d run together. Their resilience was inspiring.
Reward publicly. When your goal is profitability versus growth, you have to find ways to reward new types of effort, such as completing tasks ahead of schedule or employing creative ways to reduce budget. We had a “Frugal, Not Cheap” award that we gave out every month to a team member who saved money in smart ways. One time, one of our finance team members called our bank and asked if we could reduce our monthly fees. In minutes, she saved us nearly $100,000 a year. All these savings add up. Acknowledge them at All Hands. It reinforces that wins come come from anywhere in the organization.
The switch from gearing up for growth to planning for profitability is an exact and intense turning point for any company. It takes a shock to the system, a confident call of the profitability play, a dogged pursuit of the plan and truly letting success compound. This experience made us a stronger, more cohesive team — and a better operating company. But in the drive for that big target, I found that having a physical manifestation or icon of your goal is supremely helpful.
Being in hospitality, we have a culture of toasting and celebration, so we put a Johnnie Walker Blue up in our office bar and wrote “Do not open until B2P” — B2P being our shorthand for our build to profitability. Every time any of us walked by, it reminded us of our goal and gave us all something tangible to look forward to enjoying.
We hit profitability for the month of April 2016, about seven months after that fateful October announcement. The Johnnie Walker lasted about 10 minutes. We had never felt more unified than we did in that moment — I couldn’t have been prouder of our team. I’ll never forget it.