Silicon Valley Grapples with the Question: What’s Next?

Hope springs eternal in Silicon Valley. Or it did until recently. Like in the rest of the country, laid off employees are beginning to pile up, and no one knows how much worse things will grow before they get better.

I talked with several investors and entrepreneurs this week for their perspectives.  In their own words (edited for space):

Richard Jalichandra, CEO of blog search service Technorati

Unless you just closed a massive amount of funding, any CEO of a venture-funded startup would be foolish not to be running the business with his or her eyes wide open. I probably don’t go more than 48 hours without looking at the numbers, trying to figure out where we’re going to be at the end of the year. That’s kind of my mentality. If a few shoes drop one way, we could be jumping for joy; if they drop the other way, we could be stranded.

[In November], we laid off 6 people, or 11 percent of our staff. We also asked people to take people to take a 10 percent pay cut across the board, with executives taking a 15 to 25 percent cut.

We’ve already cut out most of the perks. We decided against moving to a nicer place before all this came down and stuck to our old coffee warehouse [in San Francisco]. Since the company’s founding, every Friday afternoon people would pop open some beer and have some nice appetizers. We’d spend over $100 every week. Now, it’s once a month, and we’re spending less than $50 dollars on chips and salsa and beer.

I believe we’re going to do okay this year. Our Q1 is looking better than Q4.  We just hired a news salesperson last week. Still, I always have a doomsday plan. I always want to know what the backstop is if everything comes to a screeching halt. We’d have to fall a long way before we got to that scenario, and I wouldn’t want to give the impression that we’re going to do more layoffs. We’ve already cut the easy corners, though. There are only hard ones left when you cut all the fat out. The math is really simple.

Scott Rafer, CEO of San Francisco-based Lookery, a site that helps owners evaluate their user data

How bad is it? Look, I’m talking to you from New York as the East Coast Regional Sales Director because I can stay cheaply in New York [with friends].

I mean, it’s a down market. You have to treat it as such and be far more risk averse. We got out of a lot of the social stuff and sold off our Facebook ad network because it wasn’t making cash. We didn’t get paid a lot but it beat just shutting it down.

As for layoffs? From my view, with 9 employees, we’re at the minimal level at which we can actually build a business, and I think a lot of people are now at that level. I think we’re okay, too. I wouldn’t bet my relatives on it or anything, but we’re getting and growing contracts, our invoices are getting paid, and our trajectory feels reasonably appropriate. If we were to cut from here, I’m not sure what we could deliver to customers.

I think people could figure out how to cut more. You could certainly get down to two employees in order to keep five years of money in the bank. But that’s not building anything. That’s social security. I think most people are at the point that if they cut more, there’s no reasonable scenario under which shareholder value grows. And investors don’t back startups to avoid bankruptcy.

By the way, that Times piece was all bullshit. Angel investors are not disappearing. A bunch of my investors are in New York. I saw two of them yesterday to keep them apprised, and they’re like, “Are you going to need more money? You realize we overpaid last year; we may have to do a down round.” But they’re starting the conversation. Their ski chalets may have dropped in value, but they aren’t going away.

Mitchell Kertzman, managing director at the venture firm Hummer Winblad

We don’t think there’s a company in our portfolio that isn’t being affected by the greater economy. The larger you are, the more traction you have, the more exposure you have. If you’re pre-revenue, it’s harder to know if [revenues are] off from what [they] might have been. But generally, everybody is getting impacted negatively.

The fundraising environment for follow-on rounds is also very tough. Borrowers are looking for a higher level of perfection than they otherwise might have. Our assumption is that it’s going to be harder for our companies to raise their next round no matter what, so we’re urging everybody to extend their cash flow.

On layoffs, I don’t think there’s a rule of thumb about [the right] percentage [of people to cut]. I was a CEO for 30 years before [entering VC], and I don’t think there’s ever a time when a company can’t tighten up ship by focusing on the bottom end of the performance spectrum.

We invest only in software, and in software, most of the money is going to headcount. If you want to make a difference, that’s where you make it. Some companies in our portfolio have had to lay people off, but there are maybe under half a dozen that are judiciously hiring, too. With some, it’s salespeople. Some, it’s more engineers.

Larger picture, I’ve lived through some recessions. Usually in the past, maybe the U.S. was down but Europe was okay, or manufacturing was down but financials were up. Now, it’s all geographies, all sectors. And no one knows how long and how deep this is going to be. I’ve never seen big companies react as quickly and as severely. But that said, nobody knows. It’s bad, but maybe it could get unimaginably worse. We just don’t know.

We’re kind of triaging our portfolio. There are ones in which we still have tremendous confidence and want to make sure we want to continue to support. Others, we may still like them, but realistically, we don’t believe that putting more money [into them] is going to materially change their trajectory. We’re not taking guns and shooting people. The nature of our investing model is that it’s hard to get to a point where you shut companies down because there’s high IP content, so frequently there’s a buyer, if not at a price that you’re happy with. We’re looking hard at that.  We’re taking a hard look at everything.