Enterprise

How Twilio CEO Jeff Lawson is balancing a desire for profits with growth and employee retention

Protocol caught up with Twilio CEO Jeff Lawson to discuss Twilio’s outlook, the path to profitability and the company’s approach to compensation.

Twilio Inc. Chief Executive Officer Jeff Lawson

"When you start a company in 2008 in the midst of the financial crisis, you really do treat every dollar as precious."

Photo: David Paul Morris/Bloomberg via Getty Images

When the stock market is tanking, an oft-cited refrain is that Wall Street activity is not necessarily reflective of the state of the U.S. economy. Many technology vendors are now extending that same thinking to their own businesses.

Amid falling share prices, software CEOs are on the defensive, arguing that company valuations don’t measure the actual results they are posting. And the leaders of SaaS companies that have yet to post a profit after over a decade of operations are steadfast in the belief that, while net income and cash-on-hand are now more significant metrics, growth remains important.

Of course, such a phenomenon is not unique to the industry. For example, it wasn’t until 2001 that Amazon began posting a profit, seven years after it launched and four years after the IPO. That is perhaps why Twilio CEO Jeff Lawson — a former employee of the ecommerce giant and avid fan of Jeff Bezos — is so bullish on his company’s future.

“On the business side, we are performing very well,” he told Protocol. But “now the environment is clearly rewarding profitability.”

Twilio is one of a handful of established IT vendors that are stuck in the enterprise doldrums. Not yet profitable, but working towards it, the company posted 48% year-over-year revenue growth last quarter. Many analysts remain bullish on the opportunity ahead, given Twilio’s prevalence among developers and expansion into first-party data. Still, its stock is down 69% this year.

That’s not only bad news for investors. Employees who have their compensation tied to Twilio’s share performance might also be feeling a little 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 is constantly reacting to Wall Street’s wild fluctuations.

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

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

The following interview has been edited and condensed for clarity.

Most analysts say the companies that are going to be in the rougher spot are those that are in the growth stage but remain unprofitable. Twilio does fall into that camp. How do you think about your path forward with the backdrop of what's happening from the macro environment?

Let's separate out two things. One is the business and two is the stock price. Right? The two are separate from each other. And on the business side, we are performing very well. We've committed guidance of 30% annual growth through 2024, that we remain committed to … profitability in 2023.

The environment used to reward growth. And now the environment is clearly rewarding profitability, which is fine. I understand all the fundamental reasons why higher interest rates basically changed the reward function for investors. Makes sense. So I understand why from a stock perspective, we are treated the way we are, which is unfortunate for us.

But we remain committed to the goals that we have for ourselves, that balance growth and profitability. And I think that's the right way to run the company.

In economic hard times, one of the first areas that companies usually look to cut has been marketing. Do you see it as different this time around?

No, I think that is happening, right? I mean, look at what Facebook's been saying. They've all but told us that companies are cutting their marketing budgets. We're not tightly coupled to the marketing arena, per se, but you are correct. Our data products make our customers' marketing more efficient.

Why do you think marketing budgets are often the first to get cut? Two reasons. No. 1: they're kind of discretionary. They're easy to cut, as opposed to salaries of employees. Those are painful and they affect humans, whereas cutting a marketing budget is easy.

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

Well, what if I can actually try to solve that equation for you: Which half is waste? We can actually start to help you pull out the waste, because you're using better data to buy more effective ads. That is a really compelling value proposition for customers in a time like this. You're spending less on marketing, but you still have the goals you're trying to meet in terms of sales. If you spend less, and then you make less, you sort of spiral.

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

The reward function for our employees historically has been growth. And now we're changing that to be profitability. It puts a closer eye on a lot of the ROI of the investments we're making and tightening up execution in a lot of places.

You think about a company that's in high-growth mode. You’re optimizing the company for top-line growth to capture a big opportunity. And that's really the mode the company has been in for the first decade or so of its life.

At some point, you get to a certain amount of scale. With the scale that we’re at, we can be — and we should be — much more efficient. And we should be really focused on the ROI of every investment more. It's not that we weren't in the past, but just more so. And that's the transformation that companies go through when they go from optimizing for growth to also optimizing for profitability.

It is a difficult one, but it is not impossible.

Are there specific areas you're looking at? I know some companies are pausing hiring, or they're looking at internal travel or employee perks, or maybe they're trying to get out of real estate.

Those are all areas that make sense. We have slowed down our hiring plans this year. We've cut back on some of our travel. We have announced that we're closing several of our offices.

When you start a company in 2008 in the midst of the financial crisis, you really do treat every dollar as precious. As you grow bigger, it does get harder to do that, but actually becomes more important. Frugality is one of our principles.

How are you thinking about compensation? And has Twilio made any changes to make sure employees who are underwater right now with their stock are made healthy?

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

But what you can do is take employees, and based on our performance-based approach, our highest performing employees every year do get grants. And we will give grants at the now-market price to those employees based on their performance.

When you take a long view, it's sort of noise. If you take a short view and this week or this month my compensation feels less than I want it to be, sure, that’s a bummer. And there’s very real impact for folks. But you can’t look at equity investment on a short-term basis. 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 aren’t on board with that, I guess some of them leave. And that's a shame. But I think that the right way to use equity compensation for employees is to build that long-term view.

There are a lot of employees who do take that short-term view. And many can now switch to another company and get in on a very low stock price. Are you expecting to see retention go down?

We continue to grant equity at lower prices. We definitely skew that towards our highest-performing employees. Are there going to be folks who hop? Sure. In fact, our attrition went up in the last year, beginning of this year.

People were actually jumping to startups because the money that got pumped into the economy, so much of it went into venture capital. That went into sky-high valuations and huge rounds in the private market. Well, guess what's happened? You're gonna see down rounds, you're gonna see repricing. A bunch of those companies aren't going to make it.

And so what people thought was, “Great, I’m gonna bounce and go get low-priced private company equity pre-IPO.” Well, that's not going to necessarily work out either.

Are one-time cash bonuses something you are looking at?

We did. That’s a bit different. Inflation is very real. And inflation tends to be permanent; not the rate, but unless you have a deflationary environment, inflation compounds over time. So we did an outsized cash adjustment this year. If in a typical year you do 2-3% for inflation, this year was a multiple of that, which obviously makes the goal of profitability harder to obtain but it’s the right thing to do for our employees. That’s different to responding to some startup out there that gave a junior engineer $10 million in equity.

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