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SAN FRANCISCO (MarketWatch) - Many Internet startups are starting to heed the dire warnings of their venture capital investors, and last week, some began cutting costs in order to survive the economic downturn, including laying off employees.
Two weeks ago, Sequoia Capital, Benchmark Capital, angel investor Ron Conway and other investors wrote some scary memos to their portfolio companies, warning them to conserve their cash, cut costs and start generating revenues. See full story.
So many companies, some of them backed by the above-mentioned firms, started making cuts. Companies ranging from online real estate appraiser Zillow.com in Seattle to Internet radio station Pandora of Oakland, Calif. to San Francisco-based ad network AdBrite all began to issue pink slips to employees last week.
Even the elder statesmen of the Internet are swinging the axe. Online auction giant eBay Inc. (EBAY:![]()
EBAY 15.03, +0.16, +1.1%) announced plans to fire about 1,000 of its workers earlier this month. Yahoo Inc. (YHOO:![]()
YHOO 12.37, +0.30, +2.5%) may announce cuts of 1,000 employees on Tuesday, according to recent reports in the Wall Street Journal and ValleyWag, a widely read Silicon Valley-based blog.
ebay inc com
Last: 15.03+0.16+1.08%
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Yahoo! Inc
Last: 12.37+0.30+2.49%
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One thing seems to be clear. As the companies who already have funding scramble to stay alive, and take up even more attention of their investors, my guess is it's going to be harder to start new technology companies, especially in the Internet sector and in capital intensive arenas such as semiconductors and telecommunications, over the next year or longer.
New data released this weekend from the National Venture Capital Association gave a glimpse into a trend that will probably continue as the economy worsens. The companies at the earliest stages in funding saw a slight drop in investing amid an overall 7% drop in venture funding, which will be exacerbated by the credit crisis. The Internet sector was a big loser of investment, with funding of Internet startups falling 36% from the second quarter.
Over the last year, venture capitalists have been faced with a very big problem: the lack of a public market for their companies. As the VCs noted on a conference call to discuss the data, there has not been a single initial public offering since March.
Venture capitalists are already spending more time with the companies in their portfolios that already should be going public. They have been holding their hands, trying to find buyers, or helping in the search for strategic partners for companies that, in another time, might already be publicly traded.
John Taylor, vice president of research at the NVCA, gave a great analogy to help understand a problem that I think is only going to get worse.
"Imagine the example of a high school that has lost its diploma-printing machine," he said. "You have all these high school seniors and it can't release them because there is no place for them to go."
If these numbers continue to build, the venture firms will start paying less attention to the very early stage companies. As their focus becomes how to get returns on their increasing investments, newer younger companies will get less attention.
With the credit markets tightening, the exit strategy via an acquisition is also getting harder. Often, companies need financing for such deals.
Other sources of capital are drying up. Angel investors are seeing their own personal portfolios take a hit, and therefore have less to work with. Attempts at bootstrapping will be harder for entrepreneurs because they will not be able to use their homes as piggy banks, and friend and family financing will be harder to come by as the credit crisis hits consumers' own pocketbooks by limiting credit cards with large balances.
The irony was not lost on anyone in Silicon Valley that AdBrite, one of the companies to cut the most jobs last week (40%) counts among its founders Philip Kaplan, the creator of one of the more infamous sites of the dot-com bust. The site - f-edcompany.com - chronicled the demises of the Internet bubble through snippets and rumors about companies in trouble.
Last week's moves were followed with a bit of glee among the media (myself included) and the VCs themselves, almost with the same kind of excitement and morbid fascination that comes before a big storm. The VCs hope to be able to use the desperation that may creep into some companies as a chance to get bigger stakes for lower valuations. And the media wants to say "we told you so." See full story.
At least one blogger has started a lame attempt to recreate F-edcompany.com, with a blog called F-edstartups.com.
"There are some pundits out there who make a living out of creating controversy or a buzz out of uncertainty," said Myles Weissleder, founder of SF New Tech, an entrepreneurial group and a co-founder of chi.mp, which helps computer users control their identities online. He said the vibe at the group's most recent gathering earlier this month was "energized."
It will be interesting to see how far entrepreneurs will be able to get in the current economy, and perhaps, it will be a true test of their ideas. Those who don't start a company with the sole intent of getting rich quickly -- an endemic problem in both the first and the Web 2.0 bubble -- will have more patience and conviction in their ideas than others. Others focusing on the more urgent field of clean tech may fare even better.
But it is still going to be tough, especially if the venture capitalists are still babysitting the high school graduates.Original here
