How Chinese entrepreneurs think about layoffs

The following article is an adapted translation of this piece, originally published by Lanchi Venture Capital on WeChat and republished on 36Kr. It has been edited and reorganized.

Since late 2018, China’s tech industry has been haunted by large-scale layoffs across almost every vertical: ecommerce, games, bike-sharing, livestreaming, hardware, travel, AI, and so on. Even giants and unicorns like Alibaba, Tencent, Baidu, Meituan, Didi, NetEase, Sina, Ctrip, and more have laid off workers or undertaken “staff optimizations.”

At Lanchi VC, we recently brought together founders from our portfolio of tech firms to talk about their experiences in the realms of layoffs and tech entrepreneurship. What follows is some of what we heard, including personal stories and wisdom from experienced entrepreneurs.

From 1,400 employees down to 21

One founder said: “At a previous company, we struggled against competitors and secured funding, but the investors refused to provide a bridge loan that would cover operations until the financing was delivered. I borrowed tens of millions of dollars from the bank personally to cover this gap, and then the investors used an impossible requirement from the investment agreement as an excuse to back out of the funding.”

Photo credit: Arif Riyanto

“At the time, I was deep in despair. The investors cut out an internal project we were incubating, and then the big layoffs came. Originally, we had more than 1,000 employees distributed across 10 cities throughout China. Within just two months, cities were down to just 20 employees. I locked my office every day because there were many resentful employees. Because the government wants to avoid mass unrest, police from the local substation were there almost every day to keep the peace.”

“Everyone was furious with me. Banks, employees, suppliers… to keep my spirits up, I read Teenage Mutant Ninja Turtles comics every day, telling myself I had to endure it, I had to keep “turtling,” and that everyone not seeing my side of things was normal. It was probably my darkest moment. I didn’t officially let go and say goodbye to that project until two years later, in early 2018, after I had finally paid the loans back.”

Exec axing

Another founder said: “My team used to have a senior exec from one of the Fortune 500 companies who was responsible for overseeing one of our regional markets. After a time, we came to realize this person wasn’t compatible with our company’s startup culture. So as CEO, I decided to ask him to leave.”

“It’s not uncommon for CEOs to have to fire people or entire teams, but this one came with a challenge: a big customer who was very important to us came and appealed on the executive’s behalf.”

“After very careful consideration, I took the risk of offending this important customer and asked the executive in question to leave. We decided that the team was the company’s foundation, and we were prepared to lose customers to build the right team.”

“This proved to be the right decision. I did have to shut down some smaller teams as well, and in the process of this overhaul, we did lose orders. Ultimately, though, a review of our business team led to better performance in the long run, and I still feel that having a bad team atmosphere is a worse risk than losing customers.”

The problem starts and ends with the CEO

After a lot of research and discussion with CEOs and human resources experts, we at Lanchi VC have seen that at the surface level, large-scale layoffs tend to happen because of tight cash flows and bloated staff sizes. But on a deeper level, the issue is generally a mismatch between three pillars – strategy, job, and talent – and the direction the company wants to move.

Matching these pillars to a company is dynamic. An employee’s strategic approach, the job role they hold, and their skill set might be a perfect fit for the company’s initial direction. But if management can’t help them adapt as the company changes course, the result will be mass layoffs. Managing people, money, and strategy are the core jobs of the CEO, so the responsibility of managing this talent structure ultimately falls to the CEO.

How to avoid layoffs

Seeking to avoid layoffs at your own startup? Here are some of the things we recommend:

How to deal with layoffs when they do happen