Thank you!

This article is by Sam Shank, CEO and co-founder of HotelTonight. At First Round’s CEO Summit, Shank shared how his team and he turned the business around in its pursuit of profitability.

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.

Examine Your Expenses — All of Them

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:

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:

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:

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.

Sam Shank

Pursue the Plan

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:

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:

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:

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:

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.

Photography by the inimitable Brett Berson.

First Round ReviewThe best advice in tech
Subscribe for Exclusive Access