Cloud computing company Opsware was nobody’s darling. Then founders Andreessen and Horowitz put the company through three rounds of layoffs. The unlikely result was a big buyout — here’s how it happened.

“I’m tryin’ to right my wrongs / But it’s funny them same wrongs helped me write this song” -Kanye West

Shortly after we sold Opsware to Hewlett-Packard (HPQ), I had a conversation with the legendary venture capitalist Doug Leone of Sequoia Capital. He wanted to hear the story of how we went from doomed in the eyes of the world to a $1.6B outcome with no recapitalization. After I took him through the details including several near bankruptcies, a stock price of $0.35/share, unlimited bad press and 3 separate layoffs where we lost a total 400 employees, he was most amazed by the layoffs. He said that during his over 20 years in the venture capital business, he’d never seen a company recover from consecutive layoffs and achieve a billion dollar plus outcome.

Leone said that he’d bet against that every time and wanted to know how I did it. Since my only experience was the great exception, I needed more information. I asked him why all the other startups failed. He replied that the layoffs inevitably broke the company’s culture. After seeing their friends laid off, employees were no longer willing to make the requisite sacrifices needed to build a company. He said that although it was possible to survive an isolated layoff, it was hugely unlikely that a company would experience great success. He added that building a highly valuable business after 3 consecutive giant lay offs accompanied by horrible prominent press coverage (we got taken apart with cover stories in both the Wall Street Journal and Business Week) was a complete violation of the laws of venture capital physics. Naturally, he wanted to know how we did it. After thinking about it for the last couple of years, here’s my answer Doug.

In retrospect, we were able to keep cultural continuity and retain our best employees despite multiple massive layoffs, because we laid people off the right way. This may sound nutty – how can you do something that’s fundamentally wrong in “the right way?” Here’s how:

Step 1: Get your head right

When a company fails to hit its financial plan so severely that it must fire the employees that it went to great time and expense to hire, it weighs heavily on the chief executive. During the first layoff at our company, I remember being forwarded an email exchange amongst a group of employees. In the exchange one of our smarter employees wrote: “Ben is either lying or stupid or both.” I remember reading that and thinking: “definitely stupid.” During a time like this, it is difficult to focus on the future, because the past overwhelms you – but that’s exactly what you must do.

Step 2: Don’t delay

Once you decide that you will have to lay people off, the time elapsed between making that decision and executing that decision should be as short as possible. If word leaks (which it will inevitably do if you delay), then you will be faced with an additional set of issues. Employees will question managers and ask whether or not a layoff is coming. If the managers don’t know, they will look stupid. If the managers, do know, they will either have to lie to their employees, contribute to the leak, or remain silent, which will create additional agitation. At Loudcloud/Opsware, we badly mismanaged this on our first layoff, but sharply corrected things on the next two.

Step 3: Be clear in your own mind about why you are laying people off

Going into a layoff, board members will sometimes try to make you feel better by putting a positive spin on things. They might say: “this gives us a great opportunity to deal with some performance issues and simplify the business.” That may be true, but do not let that cloud your thinking or your message to the company. You are laying people off because the company failed to hit its plan. If individual performance were the only thing at issue, then you’d be taking a different measure. Company performance failed. This distinction is critical, because the message to the company and the laid off individuals should not be: “this is great, we are cleaning up performance.” The message must be: “the company failed and in order to move forward, we will have to lose some excellent people.” Admitting to the failure may not seem like a big deal, but trust me, it is. “Trust me.” That’s what a CEO says every day to her employees. Trust me, this will be a good company. Trust me, this will be good for your career. Trust me, this will be good for your life. A layoff breaks that trust. In order to rebuild trust, you have to come clean.

Step 4: Train your managers

The most important step in the whole exercise is training the management team. If you send managers into this super uncomfortable situation with no training, most of them will fail.

Training starts with a golden rule: managers must lay off their own people. They cannot pass the task to HR or a more sadistic peer. You cannot hire an outsourcing firm like the one in the movie Up in the Air. Every manager must layoff his own people.

Why so strict? Why can’t the more confrontational managers just handle this task for everyone? Because people won’t remember every day that they worked for your company, but they will surely remember the day that you laid them off. They will remember every last detail about that day and the details will matter greatly. The reputation of your company and your managers depends on you standing tall, facing the employees who trusted you and doing your jobs. If you hired me and I busted my ass working for you, I expect you to have the courage to lay me off yourself.

Once you make it clear that managers must layoff their own people, be sure to prepare them for the task:

1. They should explain briefly what happened and that it is a company rather than a personal failure.
2. They should be clear that the employee is impacted and that the decision is non-negotiable.
3. They should be fully prepared with all of the details of the benefits and support that the company plans to provide.

Step 5: Address the entire company

Prior to executing the lay off, the CEO must address the company. The CEO must deliver the overall message that provides the proper context and air cover for the managers. If you do your job right, the managers will have a much easier time doing their jobs. When you do this, keep in mind what Intuit founder Bill Campbell told me – the message is for the people who are staying. The people who stay will care deeply about how you treat their colleagues. Many of the people that you lay off will have closer relationships with the people who stay than you do, so treat them with the appropriate level of respect. Still, the company must move forward, so be careful not to apologize too much.

Step 6: Be visible, be present

After you make the speech telling your company that you will be letting go of many them, you will not feel like hanging out and talking to people. You will probably feel like going to a bar and drinking a fifth of tequila. Do not do this. Be present. Be visible. Be engaging. People want to see you. They want to see whether or not you care. The people who you laid off will want to know if they still have a relationship with you and the company. Talk to people. Help them carry their things to their car. Let them know that you appreciate their efforts.

Acknowledgements

I would like to say that I came up with all of this on my own, but in truth there is no way that I could have done it without the help of my dear friend Bill Campbell. Bill’s help during these times saved the company. Finally, I again thank all of the wonderful and dedicated people who worked for Loudcloud that we laid off or transferred to EDS. I am sure that I speak for everyone who ever worked at Opsware, when I say “thank you for saving our butts.”

— Ben Horowitz is co-founder and general partner of Andreessen Horowitz, a venture capital firm created to support the needs of today’s technology-focused entrepreneurs through angel investments to large scale funding. Ben currently serves on the board of Okta, Nicira, Proferi and Skype.