06 Apr Mercury News | Silicon Valley startups stumble, forced into cost cutting
By: Marisa Kendall | firstname.lastname@example.org
Once it seemed there was nowhere to go but up.
Today, with fears of bloated valuations, a rocky stock market and the worst IPO climate since the financial crisis of 2008, startups are coming down from the clouds. And to woo venture capitalists, they are talking about profitability and high gross margins to prove they are building sustainable businesses — not just sexy ones.
“Bottom line is that entrepreneurs and investors alike have discovered that gravity exists after all,” said Robert Ackerman Jr., managing director and founder of Allegis Capital.
Reflecting a more sober Silicon Valley, at least a dozen Bay Area startups have cut costs by laying off staff since November. Others in the saturated on-demand industry, like San Francisco’s Zirx, are changing their focus. And a few have simply shut down, with Berkeley-based SpoonRocket becoming the latest victim.
Those changes are signs of healthy market correction after years of frenzied overspending, said Paul Boyd of San Francisco-based wealth management firm ClearPath Capital Partners. But that doesn’t mean they’re not painful — for everyone. As startups spend less, the slowdown will be felt in other areas as well, he said.
“It’s almost like ink,” Boyd said, “it’s going to slowly spread.”
His team keeps a close eye on the VC and startup ecosystem as an indicator of the health of the overall economy. Right now, the signs aren’t pointing in a positive direction.
Venture capital funding in the U.S. dropped by about 30 percent in the fourth quarter of 2015 compared with the quarter before, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association. Meanwhile, IPO activity has all but dried up. The cash raised by IPOs in the first quarter of 2016 was down almost 90 percent from the quarter before, according to data from Renaissance Capital, and only eight companies went public. The only Silicon Valley offering was a Burlingame pharmaceutical company.
Last month Optimizely, which helps companies test and improve their websites and mobile platforms, announced it was laying off 40 people, or 10 percent of its team. Despite raising more than $146 million in funding from some of Silicon Valley’s most prestigious venture capital firms, the company was struggling to break even. In a blog post announcing the layoffs, CEO and co-founder Dan Siroker pointed to a “wake-up call” in February when public cloud companies collectively lost $28 billion in market value in one day, signifying that “the market has clearly shifted.”
Insurance software startup Zenefits announced it cut 250 jobs in February, after revelations that some of the company’s employees were selling insurance without a license. The company, which sells health insurance and provides companies with software to manage employee benefits, once had been revered as the software industry’s fastest-growing startup. In two years the company ballooned from 15 employees to 520, and CB Insights reports it’s now valued at $4.5 billion.
“It’s no secret that Zenefits grew too fast, stretching both our culture and our controls,” CEO David Sacks wrote in an email to employees announcing the layoffs.
Other San Francisco companies that reportedly cut staff in recent months include wearable tech company Jawbone, mobile and web analytics company Mixpanel, dating website Zoosk and Practice Fusion, which digitizes health records. Jumio, a Palo Alto-based credit card authorization company, announced last month that it’s filing for bankruptcy and selling its assets.
The market shift caught Foster City resident Erica Halverson off guard. She spent just four months as marketing director for SenStay, a property management startup for home-sharing rentals, before she was laid off in February along with a handful of other employees.
“It put me literally into a panic,” 39-year-old Halverson said, “because I had a commitment from the company and I had expectations that I was helping them build and get to a certain level. And I felt like the rug was ripped out from under me.”
Now Halverson spends most of her time job hunting, sending out 10 to 15 résumés a day.
The shift is especially noticeable in Silicon Valley’s on-demand industry, where dozens of mobile apps compete to deliver everything from meals to baby sitters. San Francisco restaurant delivery startup DoorDash recently had to slash its valuation in order to raise another round of funding. The company reported a $127 million Series C round in March at a $700 million valuation — falling short of its reported goal to hit a $1 billion “unicorn” valuation.
Berkeley-based SpoonRocket, which prepared and delivered meals to customers, shut down last month. The company failed because it expanded too quickly, said Rahul Ramakrishnan, president of UC Berkeley-based consulting group Venture Strategy Solutions.
Ramakrishnan worked with SpoonRocket to optimize its delivery routes in Berkeley about three years ago. He said the company was doing well in Berkeley, but its business model fell apart when it expanded into San Francisco. The demand was too high, the company didn’t have enough drivers and the couriers had a hard time navigating the city’s traffic, he said.
“They expanded at a rate in which they couldn’t keep up with their promise to deliver food in under five minutes,” Ramakrishnan said. “That made customers very angry.”
San Francisco-based Bento, which prepares and delivers customized Asian meals, recently shifted gears to avoid a fate similar to SpoonRocket’s. Bento’s original on-demand model was too expensive to be sustainable, said CEO Jason Demant, so now the company requires customers to pre-order their lunches in the morning.
“We decided to try something else before we ran out of time,” Demant said. “It’s really tough to raise money.”
Other companies couldn’t distinguish themselves from the competition. In January ride-booking platform Sidecar announced it was shutting down and selling its assets to General Motors.
“We were unable to compete against Uber, a company that raised more capital than any other in history and is infamous for its anti-competitive behavior,” co-founder and CEO Sunil Paul wrote in a blog post.
In February San Francisco-based Zirx shut down its consumer on-demand valet parking service because it was too expensive to buy parking spaces, CEO and co-founder Sean Behr said. Zirx pivoted to a business-to-business model, which includes parking for employees, as well as some new features Behr has yet to reveal.
“Given where I believe the funding market is headed, and has been headed,” Behr said, “it was a tough decision, but the best one for the company.”
Kendall, Marisa. “Silicon Valley startups stumble, forced into cost cutting.” Mercury News. 5 April 2016. Web. 6 April 2016.