Can Silicon Valley Avoid a Wall Street-Like Meltdown?
The sky is falling--or at least slipping a little. The days of wine, roses and bouquets of venture capital dollars for tech companies are a thing of the past as the economy continues its dive. Investments are drying up, layoffs are prevalent and startups are getting frugal. But not all is doom and gloom. While some speculate that Silicon Valley has the potential to experience the next Wall Street-like meltdown, serious startups are out to prove smart tech companies can and will survive.
"I really do believe that great companies are built in difficult environments where others are on their heels and sitting on their hands," says Chris Albinson, managing director of Silicon Valley investment firm Panorama Capital.
Cloud computing startup Egnyte in Mountain View, Calif. had the fortunate timing of closing its first funding round in July after bootstrapping the company since its founding in 2006. CEO Vineet Jain was already seeing a slowdown in tech investments that had only gotten worse since the summer.
"VC firms are not giving out cash, but they're supporting current investments," Jain says. "If you're a new company looking for funding, it's going to be much more difficult."
Egnyte's lean approach--with outsourced engineers and a six-person core employee group--has paid off in solid prospects for the business. Other companies are turning to Egnyte's cloud computing solutions to save money.
"Tech is going to be hit hard, but 2009 could be a fairly good year for us," Jain says.
Funds Still Available
Investment funds may have tightened, but they haven't completely dropped off. Deborah Magid, director of software strategy with IBM Venture Capital Group, has been keeping a close eye on the market.
"[Venture capitalists] will continue to invest. They're just being more cautious and they're looking for deals that reduce risk," she says.
Tech companies that rely solely on online advertising growth or just collecting "eyeballs" for their site will be at a disadvantage. Startups that do manage to land funding will tend to have established management teams and a revenue model that's designed to be strong in a weak consumer economy, according to Magid.
When it comes to building up that strong revenue model, Magid recommends some tips. "Help make the buying decision easier by lowering barriers to entry and reducing risk for the customer," she says. "Software as a Service is one model that allows this and is very popular right now." She also recommends reevaluating your current revenue model. For example, if you have an ad-supported model in a competitive market, you might consider changing to a different revenue model. Stay apprised of your customers' ability to spend in this economy, and adjust your cash spending as necessary.
Time is always a factor. Tech startups that were able to raise a yearly round of funding are now looking at making their cash last for 18 months to two years. They're being forced to find both old-fashioned and newly creative ways to extend their runways, from thinning the work force to bringing certain functions back in-house.
"Get some really great engineers, keep the team small and get some Renaissance people who can do a little bit of marketing, a little bit of sales and a little product management," says Will Price, CEO of Widgetbox, a San Francisco widget startup that trimmed its workforce from 30 people to 18 people, many of whom can operate in more than one capacity. Though Price says there was nothing wrong with the staff that was laid off, "The cuts roughly doubled our cash-out date, so it was a big way to extend the runway."
They also ended their PR firm contract, moved their marketing in-house and reduced their overall annual expenses by 40 percent. As a result, Widgetbox has cash on hand to last for two years.
"It has forced us to be a lot more thoughtful about what we do, how we contract for services and how we think about revenue models," Price says.
Nobody is expecting a fast recovery from this widespread economic downturn. Tech startups can't get by on experimentation anymore. Entrepreneurs of all stripes have to prove that they can turn their business ideas into actual cash generation.
"I go back to this core idea: Do you really have a value proposition that resonates in a difficult market?" says Albinson, Panorama Capital's managing director. "Make sure you're finely tuned on that and then organize the resources of the company based on the delivery of that value proposition."
Considering Silicon Valley's history of catered lunches, game rooms and boom times, the ability of tech startups to rein in expenses and continue to grow bodes well for savvy entrepreneurs everywhere.