VRChat Lays off 30% of Company, Citing Growing Pains Following COVID Platform Boom

VRChat, one of the oldest and most popular social VR platforms, announced it’s laying off “around 30%” of its staff, citing issues with slower than anticipated growth, over-hiring during its boom in 2021, and the slow adoption of a more conventional corporate structure.

The news was announced in an extensive internal email outlining the decisions behind the layoff round, which was also published officially on the company’s website. We’ve also included the full email at the bottom of the article.

In it, VRChat CEO Graham Gaylor says the studio is “reducing the size of our team by around 30%,” noting that while studio leadership is “very optimistic on VRChat’s long-term success” and there is a two and five-year plan in place for further growth, the studio is “too large in its current form to support the health and growth of the business.”

Gaylor says this was due to a few key factors following the 2021 banner year for the social VR app, which the studio said slowed in 2022 alongside VR’s relative overall market growth.

According to data obtained from SteamDB, the platform has ostensibly seen a consistent rise in user numbers in recent years, suggesting the issue lies more with the studio having outpaced the market by over-hiring during the 2021-2022 period. Granted, Steam user data doesn’t tell the whole picture, as the platform has also been available on Quest devices since 2020, however Steam data suggests VRChat isn’t falling out of favor, rather experiencing less exponential growth than seemingly expected.

Gaylor reveals the company over-hired during its 2021 boom, which came as a result of the COVID-19 pandemic, having taken on too many individual contributors (ICs) in the 2021-2022 time period. Gaylor says the bulk of the company is made up of ICs.

“Not only did we not maintain 2021 levels of growth, we shrank year over year,” Gaylor explains. “A scaled team with a smaller user base led to an oversized organization & burn rate relative to revenue and product scale.”

Another factor was the late adoption of a traditional corporate structure, as up until mid-2023 the company considered itself a “flat organization,” notably lacking a product and people management layer to better mobilize its ICs.

“We need more time and runway to execute,” Gaylor explains. “With management in place, we now understand what we need for success over the next five years. We’re in a good cash position, but to execute effectively on our five-year strategy, we need an extended runway with line of sight to profitability. The current fundraising environment is tough, and we’ll likely struggle to fundraise without greatly improved metrics. To take control of our own destiny and not solely depend on market-driven outside investment, we’re placing an emphasis on capital efficiency to ensure VRChat thrives.”

As recompense, the studio is offering a severance package to former employees. This includes 12 weeks of severance pay, plus an additional two weeks for every year of employment beyond three years, and an additional three weeks beyond five years. It’s also paying for up to six months of healthcare coverage for “those who are eligible.” The studio is also making it easier for those affected to both vest and exercise stock options.

Founded in 2014, VRChat celebrated its first hit of virality back in 2018, bringing a 17x rise in usership over the course of just a month to a peak of 20,000 concurrent users of the game on Steam.

In 2021, the studio secured $80 million in Series D funding, led by Anthos Capital, bringing its overall outside investment to $95.2 million to date. In May 2023, VRChat announced it was releasing its digital economy in effort to finally monetize the free app, which came some six years after its initial release on Steam.

The app supports both VR and flatscreen users across PC, Quest, Android and iOS (currently in closed beta).

The original email follows below:

To: All VRChat Employees Personal and Company Emails
From: Graham Gaylor, CEO
Subject: Important Announcement – Company Update – June 2024

Hi everyone,

Today, I have some very hard and sad news to share. We’re reducing the size of our team by around 30% and saying goodbye to many talented team members in the process. This is the hardest change we’ve had to make at VRChat, and Jesse and I take full responsibility for the decisions that brought us here.

Our responsibility is to maintain and grow the space we’ve created in VRChat, where so many people have found friends, family, and happiness – and most of all, to bring that opportunity to everyone. Although difficult, this decision enables us to uphold our responsibilities for many years to come.

You all deserve to understand why we’re here and how we came to this decision. Below I’ll provide some broader context and outline what you can expect next.

Where we are today
Over the last ten years, we’ve built a product that millions of people love. We were one of the first popular apps on the SteamVR and Oculus stores and as the VR market grew, we grew with it. When VR growth slowed in 2022, and VRChat’s growth slowed with it, we were faced with the challenge of needing continued growth despite a core market that needed longer to mature. Our solution this year was to build a product organization to help us identify, focus, and execute on what would make us continue to grow despite market conditions. The result is promising.

We have strong new product leadership

We have a clear mission to bring the magic of immersive social connection to billions of people

We have a clear two and five-year plan to get us to rocket-ship levels of success

We’re building strong management support for our team and product

We’re validating where we’re spending our time for the most impact

For these reasons and more, I’m very optimistic on VRChat’s long-term success. We have a huge opportunity in front of us, but to seize it, we need to be fast-moving, nimble, and make smart (and sometimes difficult) decisions. The hard decision today is that our team is too large in its current form to support the health and growth of the business.

What’s driving this decision?
In March, we ran an analysis to better understand how VRChat would be able to achieve its goals over the next five years. We had four major learnings from this exercise –

We took too long to add management. Historically, we’ve been a flat organization, with most of the team being individual contributors (ICs). This appeared to work well, as we continued to see strong product growth with the market into 2022 without a management layer. Then VR growth slowed, and VRChat’s growth slowed and we found ourselves with a team of talented IC’s all doing their best to help achieve the company’s goals. It took us until mid-2023 to recognize that we needed a product and people management layer to help align all of our talented IC work towards our goals and what skill sets we needed to grow over time.

We over-hired ICs. We saw incredible growth in 2021-2022 and, in anticipation of continued growth, scaled our IC team significantly. The reality was different. Not only did we not maintain 2021 levels of growth, we shrank year over year. A scaled team with a smaller user base led to an oversized organization & burn rate relative to revenue and product scale. We hired tremendously talented people who worked on a lot of great ideas and projects, but without a management layer to align everyone towards the same goals, we did not set everyone up for success.

We need more time and runway to execute. With management in place, we now understand what we need for success over the next five years. We’re in a good cash position, but to execute effectively on our five-year strategy, we need an extended runway with line of sight to profitability. The current fundraising environment is tough, and we’ll likely struggle to fundraise without greatly improved metrics. To take control of our own destiny and not solely depend on market-driven outside investment, we’re placing an emphasis on capital efficiency to ensure VRChat thrives.

Some different roles and expertise are needed for the next part of our journey. Over the past ten years, we’ve built an incredible product with an incredible team, and we wouldn’t be here without each and every one of you. The next ten years are going to look different. As we focus on getting to scale, we need the right people in the right roles at each stage of the journey. This is painful, and at the same time, I do believe it’s the right decision to make VRChat as successful as we all believe it can be.

Jesse and I are so deeply sorry for the impact this change will have on all of you. We’re going to do what we can to ensure that each and every one of our departing team members are setup for success for whatever is next.

How did we decide on who was part of the reduction?
As we modeled our five-year plan balancing profitability with business growth, we arrived at the hard conclusion that we needed to reduce the team by around 30%. We determined which critical skills, expertise, and roles matched our future business needs and based decisions on these criteria.

These decisions are not a reflection of the quality of the team members who are leaving, but rather one of a changing business and market.

How do we plan to take care of the team?
We wouldn’t be here today without all of you and your passion, dedication, and creativity. While nothing can make up for losing a job, we’re going to do our best to treat departing team members as respectfully as possible and do our best to help transition them to what’s next. Some details include

Severance Pay. We will pay 12 weeks of severance for all departing team members, and an additional two weeks for every year of tenure beyond three years, and an additional three weeks beyond five years. For international team members, we are paying the greater of our package or amounts required under local law.

Healthcare. We will pay for up to 6 months of healthcare coverage for those who are eligible.

Stock Option Vesting. We’ll waive the one year cliff for anyone who hasn’t already passed the one year mark.

Stock Option Post Termination Exercise Period (PTEP). We’ll extend the amount of time departing team members have to exercise their options from 90 days to 1 year and longer for those with significant tenure.

Career Support. We’ll offer a career support service, and do our best to connect departing team members with other companies.

VRChat Specific Support. We know that VRChat is more than just a company to many of you and hope that even post separation, you maintain your love and passion for the product and community that we’ve built together. For those interested, we’ll support departing team members with a few VRChat specific perks.

Lifetime VRChat Plus. Departing members will get a lifetime subscription to VRChat Plus.

VRChat Alumni Badge. An in-VRChat badge that signifies the individual is a member of the VRChat alumni group, once our badging system is available.

Higher Creator Economy Rev Share. For departing team members who want to start a business using the VRChat Creator Economy, we will reduce VRChat’s transaction fee for any purchases made from your store.

Most importantly, although this is not the separation we would have wanted or imagined, we want everyone who is leaving to know that we care about you as former colleagues and appreciate everything you’ve done for VRChat.

What to Expect Next
Immediately following this announcement, everyone will receive an email from HR to your personal email and your company email, confirming whether or not your role has been impacted. For those impacted, you’ll receive an additional email to your personal email with the details of your severance package and instructions to attend a meeting to discuss the details of your departure. If you don’t know what personal email was used, please email the VRChat HR Team.

For those of you staying, it’s going to be a little bumpy while we navigate a lot of change all at once. Our focus today is supporting departing team members and setting them up for success. We ask for your support and patience and to help us do right by our users and departing team members throughout this process.

Moving Forward
We are where we are today. But we can learn from this to reduce the chance of needing a reduction again in the future.

Management. We now understand the importance of management in supporting a large team and will ensure we appropriately balance management and ICs on the team. I expect to leverage the expertise of our new management team to bring best practices to VRChat.

Overhiring. Moving forward, every single new hire will be scrutinized through a variety of lenses. Is the role critical to our goals? Is there a business need? Are they the absolute best person for the role? Can somebody internally fill the role? Can we contract out the role? We’ll move back to our early team growth philosophy of staying lean and scrappy instead of growing for growth’s sake. When we see our product growth take off again, we’ll reinvest in our team more efficiently and mindfully.

Runway. For most of our history, we’ve always only had 1-2 years of runway. The strategy was that we could always easily raise additional capital. While the capital markets will surely get better over time, our capital strategy will shift towards taking control of our own destiny and being more efficient with our capital. We’ve started pushing on capital efficiency by focusing on revenue growth and lower infrastructure costs for our H2 goals. With our smaller team and our H2 goals, we have a line of sight to profitability and a clear path to an extremely strong business and platform. We’ll regularly share financial projections with the team to empower high-quality decisions with full context

Changing Roles and Expertise. As our company grows and changes, so do its needs from its team. We plan to support our team with more people-focused managers and are actively investing in career growth and trajectory tools to help our team understand how they need to grow and how to do so, what’s expected of them, and what great looks like. We’ll also hire with the future in mind and work to bring in new expertise as needed.

Focus Without Fear. One of our goals for this reduction is to only do it once so we can focus on our mission without the fear of future reductions hanging over our heads. It’s impossible to know what the future holds, but we’ve chosen to reduce our team size enough today that we won’t have to do this again for the foreseeable future.

While today is painful as we say goodbye to our talented friends and colleagues, we are setting up VRChat for long-term success. We have our work cut out for us, and now we have the foundation and time to execute towards our goals.

Our mission remains the same, and it bears repeating: to enrich the world through immersive social connection and bring that magic to billions of people. Our responsibility is to maintain and grow the space we’ve created in VRChat, where so many people have found friends, family, and happiness, and to bring that opportunity to everyone.

To those leaving VRChat,

Thank you again for all of the love, dedication, and time you’ve put into helping us build VRChat. We wish you all the best on what’s next and will do our best to support you on your journey there.

With love and sadness,

Graham and Jesse