Saving on People Today Means Losing the Company Tomorrow

In times of turbulence, every entrepreneur faces the same dilemma: should they shrink and lay off staff, or conversely, seize the opportunity to attract top talent from the market and acquire weakened competitors? The answer lies not in the current balance sheet, but in shifting the mindset from income to capitalization.

The initial reaction to a crisis is predictable: preserving the core team or hiring new talent requires capital. However, a few years ago, I realized that for a long time, I had been thinking like an entrepreneur in the wrong way. I was focusing on categories of current revenue and profit growth. But if you want to build something of scale, at a certain point, you must transition to thinking in terms of Return on Investment (ROI), company valuation, and capital.

Simple Mathematics

Consider a classic example. An entrepreneur manages a business manually, acting as both owner and CEO. The market usually values such a business at twice the owner's annual earnings. If you earn $300,000 a year, your company is worth approximately $600,000.

To step away from day-to-day operations, you need to build a management system, hire executives, and perhaps undergo expensive training programs. This requires time, tens of thousands of dollars, and immense personal effort. Looking at this through the lens of current profit, an entrepreneur often hesitates: "Is it worth it? Will I spend a fortune of resources just to work less?"

But when viewed as an asset valuation, the picture changes dramatically. Imagine the owner invests the time and money, hires a managing director, and establishes a management structure. With a solid team, healthy organic growth is about 30% per year. If a company does not grow at this rate under normal conditions (excluding force majeure like war or pandemics), there are deep-seated systemic issues within.

After 2–3 years, the company grows by 25–30% annually, increasing its scale by 2 to 2.5 times. More importantly, the valuation multiple changes. Since the business no longer relies on a single person, it is no longer valued at a multiple of 2, but at a multiple of 4.

Talent as an Investment Asset

Returning to the issue of staffing during a crisis, I recommend making decisions based on your strategy over a multi-year horizon.

In my practice, I have invested in 87 startups. Three went bankrupt, a couple became unicorns (reaching a market valuation exceeding $1 billion), and one fully returned the investment. Why do investors put money into projects that are loss-making at the start? Because we are buying the future, expecting exponential returns.

The same logic applies to a team. The consulting firm Gallup calculated the cost of replacing an employee. For an entry-level position, it costs 1–2 months' salary (recruitment, onboarding). For a mid-level manager, it can be up to 6 months' salary.

Therefore, even if the market is facing a total catastrophe and current income is insufficient, there is no issue with borrowing money for payroll to retain the team—provided you have a strategy for capitalization growth. A team is difficult and very expensive to rebuild from scratch.

Nuances of Crisis Management

Of course, strategy does not override tactical common sense. Recall the beginning of the COVID-19 pandemic. My clients, mostly entrepreneurs, were paralyzed and took a "wait-and-see" approach: "Let’s wait a month or two, and it will all be over."

This paralysis hit my business, and we saw a decline. We realized it wouldn't end quickly and had to downsize. But the question is: who do you let go? We parted ways with recent hires—those in whom we had not yet invested significant time and resources. We preserved the core team, the bearers of the company's value.

The Airbnb Case Study

A prime example of this approach is Airbnb during the 2020 crisis. At the start of the pandemic, the company's revenue plummeted, and the market virtually ground to a halt. Airbnb had to lay off part of its staff, but the pivotal decision was elsewhere. Leadership intentionally retained the core of the product, engineering, and management teams, viewing these people as an investment in the future value of the business rather than a current expense. By December 2020, the company went public, and investors valued the business at tens of billions of dollars.

Conclusion

In a crisis, the winner is the one who views their business through the eyes of an investor. If you have a strategy leading to an increase in company value, you can afford short-term losses to preserve your primary asset—the team. If there is no strategy—both hiring and firing—will merely be a reaction to external circumstances rather than a step toward success.

Building a system that turns chaos into capitalization is not magic; it is a technology. This is exactly what the masterclass "How to Strengthen the Team, Solidify the Business Foundation, and Reach a New Level" is about. Register via the link: https://go.bbooster.online/rpd6