Software startup Pitch has suspended hiring. Here’s why.

ByLance T. Lee

Jul 15, 2022

Of course, such a phenomenon is not unique to the industry. For example, it wasn’t until 2001 that Amazon started showing profits, seven years after its launch and four years after the IPO. Perhaps that’s why Twilio CEO Jeff Lawson, a former employee of the e-commerce giant and big fan of Jeff Bezos, is so optimistic about the future of his company.

“Business-wise, we’re doing very well,” he told Protocol. But “now the environment clearly rewards profitability.”

Twilio is one of the few established IT vendors that are stuck in the corporate doldrums. Not yet profitable, but working on it, the company released Revenue growth of 48% year over year last quarter. Many analysts remain optimistic about the opportunity ahead, given Twilio’s prevalence among developers and expansion into first-party data. Still, his stock is down 69% this year.

This isn’t just bad news for investors. Employees whose pay is tied to the performance of Twilio stock may also feel a bit grumpy. But Lawson remains hesitant to pursue any option that could further dilute Twilio’s stock or put the company in a position where it constantly reacts to wild swings on Wall Street.

In other words, if you’re a Twilio employee, don’t expect the company to rescue you from the realities of the stock market.

“You can’t make people whole the same way that when the stock price goes up, you don’t ask employees to give it back. When it breaks down, the company cannot make the employees whole. To me, that’s not how it works,” Lawson said.

In a chat with Protocol, Lawson discussed Twilio’s outlook, path to profitability, and the company’s approach to compensation.

The following interview has been edited and condensed for clarity.

Most analysts say that the companies that will be in the most difficult situation are those that are in the growth phase but remain unprofitable. Twilio falls into this camp. How do you think of your path to follow against the backdrop of what is happening in the macro environment?

Let’s separate two things. One is the company and the second is the stock price. Right? Both are separated from each other. And on the business side, we’re doing very well. We are committed to achieving 30% annual growth through 2024, which we remain committed to achieving…profitability in 2023.

The environment used to reward growth. And now the environment is clearly favorable for profitability, which is good. I understand all the fundamental reasons why higher interest rates have fundamentally changed the reward function for investors. Logic. I therefore understand why, from a stock market point of view, we are treated as we are, which is unfortunate for us.

But we remain committed to the objectives we have set ourselves, which balance growth and profitability. And I think that’s the right way to run the business.

In tough economic times, one of the first areas companies typically look to cut back on is marketing. Do you see it as different this time around?

No, I think that’s what’s happening, isn’t it? I mean, look what Facebook said. They almost told us that companies were cutting their marketing budgets. We’re not closely tied to the marketing field per se, but you’re right. Our data products make our customers’ marketing more effective.

Why do you think marketing budgets are often the first to be cut? Two reasons. #1: They’re sort of discretionary. They are easy to cut, unlike employee salaries. These are painful and affect humans, while cutting a marketing budget is easy.

Second, in this world where I have no idea half of my marketing is wasted, it’s easy to cut it off. The downsides of the business are probably going to be that you know less. I don’t think most companies cut their marketing spend to zero, but they moderate it.

Well, what if I could actually try to solve this equation for you: which half is waste? We can really start helping you eliminate waste as you use better data to buy more effective ads. It’s a really compelling value proposition for customers in times like these. You spend less on marketing, but you still have the sales goals you’re trying to achieve. If you spend less and then earn less, you’re sort of spiraling.

You talked about this path to profitability. What are you actually going to do to get there?

The reward function for our employees has always been growth. And now we’re changing that to be profitability. This puts a closer eye on a lot of the ROI of the investments we make and tightens execution in many places.

You are thinking of a business that is in high growth mode. You optimize the business for revenue growth to seize a big opportunity. And that’s really the mode the company was in for the first decade of its life.

At some point, you reach a certain scale. With the scale we are at, we can be – and should be – much more efficient. And we should focus more on the ROI of every investment. It’s not that we weren’t in the past, but just more. And that’s the transformation that companies go through as they go from optimizing for growth to optimizing for profitability.

It’s difficult, but it’s not impossible.

Are there any specific areas you are considering? I know some companies are suspending hiring, or considering internal travel or employee benefits, or maybe trying to get out of real estate.

These are all areas that make sense. We have slowed our hiring plans this year. We have reduced some of our trips. We have announced the closure of several of our offices.

When you start a business in 2008 in the midst of the financial crisis, you truly consider every dollar valuable. As you grow, this becomes harder to do, but actually becomes more important. Frugality is one of our principles.

How do you envisage compensation? And has Twilio made any changes to ensure employees who are currently underwater with their stock are healthy?

You can’t make people whole the same way that when the stock price goes up, you don’t ask employees to give it back. When it breaks down, the company cannot make the employees whole. For me, that’s not how it works.

But what you can do is take employees, and based on our performance-based approach, our top performers receive grants each year. And we will provide subsidies at the current market price to these employees based on their performance.

When you take a spyglass, it’s kind of a noise. If you take a short view and this week or this month my pay seems less than I want, of course that’s a disappointment. And there is a very real impact for people. But you cannot consider investing in stocks for the short term. It’s like trying to time the stock market. Buy-and-hold is the only proven approach.

That’s what we tell our employees. And employees who don’t agree with that, I guess some of them leave. And it’s a shame. But I think the right way to use equity compensation for employees is to build that long-term view.

There are many employees who take this short-term view. And many can now switch to another company and take advantage of a very low price. Do you expect to see retention drop?

We continue to grant equity at lower prices. We definitely direct this towards our top performers. Will there be people jumping? Sure. In fact, our attrition has increased over the past year, at the beginning of this year.

In fact, people were turning to startups because the money that was injected into the economy was largely invested in venture capital. This has resulted in exorbitant valuations and huge rounds in the private market. Well, guess what happened? You’re going to see rounds down, you’re going to see a revaluation. A lot of these companies won’t make it.

And so, what people thought was, “Great, I’m going to bounce back and go get some cheap private company stocks ahead of the IPO.” Well, that won’t necessarily work either.

Are one-time cash bonuses something you’re considering?

We were doing. It’s a little different. Inflation is real. And inflation tends to be permanent; not the rate, but unless you have a deflationary environment, inflation gets worse over time. We have therefore made a disproportionate cash adjustment this year. If in a typical year you have 2-3% inflation, this year was a multiple of that, which obviously makes the profitability target more difficult to achieve, but it’s the right thing to do for our employees. That’s different from responding to a startup that gave a junior engineer $10 million in capital.


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