When I’m not
procrastinating by writing blog posts, I’m the CEO of a Silicon Valley technology company. For the past few weeks, while the credit crisis wrought havoc on Wall Street and some of my colleagues were forced to face the reality that the already anemic IPO market, channeling Punxsutawney Phil, was likely to go back into its hole for another six weeks year , we had mostly remained unassaulted by the crisis. Sure, those running consumer-focused businesses were already feeling the impact of plummeting consumer confidence, but fundamentally we were confident that our venture capital investors were smart enough not to act like lemmings and assume that, just because the public markets are in trouble, so was their portfolio. After all, Silicon Valley focuses on the long term, right? It’s smarter, more creative, perhaps even iconoclastic . . . right??
Not so. Enter Sequoia Capital’s “RIP Good Times” presentation. Within a day, eight people had forwarded it to me, along with notes taken by a briefly-anonymous Sequoia portfolio CEO. Shortly thereafter came the Benchmark Letter, which another investor and our corporate counsel both forwarded to me. And the Ron Conway email. The argument is that revenues and earnings will fall off the table (thus perhaps justifying the fact that today’s S&P 500 is trading at a pretty low average P/E of 10.5), thus necessitating tectonic readjustments to spending.
And there it was: in one great, coordinated movement, Silicon Valley panicked. It was as if the Valley remembered 2000-2001 and couldn’t sleep. A friend of mine, at a Seqoia company, worked the weekend and executed a 40% layoff earlier this week. Hi5 cut staff, Zillow and Adbrite did the same, and the list goes on and on. One day everything is fine; the next, the world is ending. Trader mentality hit Sand Hill Road. With the zeal of the converted, a paroxysm of cost-cutting swept Valley CEOs.
This “stampede for the exits” mentality of supposedly long-term investors here in the Valley makes zero sense. One of my Directors correctly pointed out that Moritz et al. at Sequoia were undoubtedly “firing for effect,” and I’m sure they were, but tell that to the employees laid off by my friend’s Sequoia-backed company. The problem with making rapid adjustments to early stage companies is that the adjustments themselves effect the business. There’s a Heisenberg Uncertainty Principle in startups: trimming too fast or too precipitously will injure the company far more deeply than it would a larger, established company. Why? Because start-ups in particular rely on their employees to go the extra mile, think the impossible is possible, burn the midnight oil, and invent the ingenious. They also rely on their employees knowing they’re involved in something special, relishing their creative environment, and collaborating with their colleagues. (For which, of course, they need to have colleagues…!) Take all that away, and a start-up is just a thinly-staffed, under-capitalized company with no track record or proven market.
There’s another, more profound risk, however: react too strongly and Heisenberg will assure your startup misses the market opportunity it’s not expecting. The problem with over-optimizing, particularly in venture-backed companies, is that they will miss the unexpected, creative opportunity, either because they are so busy dealing with the ramifications of precipitous cost-cutting or because they will be so under-staffed and so hyper-focused on cash flow that they will have neither the energy nor the creative spirit to do something daring when the opportunity presents itself.
Does this mean we should be spending profligately and ignoring the broader dynamics of the economy? Of course not. No CEO in his or her right mind would do so. But the fact remains that what makes Silicon Valley great is certainly not its ability to play the part of proverbial “tail” to the economic dog which wags it. Every one of us should take a careful look at our spending, our sales forecasts, and make sensible business decisions based on what we see. (In our case, we see changes coming and are adjusting for them. We’re cutting where we need to, investing where we can afford to, and otherwise treating the shake-up as an opportunity to test every single one of our assumptions. And, yes, if one of those assumptions changes and we see a problem, then we’re going to cut spending.) But lay off 40% of staff just because someone gave a presentation?
Fortunately, voices of sanity have begun to speak up. My friend and colleague Pascal Levensohn (full disclosure: also now an investor and Board member in my company) wrote an excellent post today putting context around the Sequoia presentation. And none other than the Sage of Omaha himself is going long on US equities. All of us running businesses under these economic circumstances are well-served to create a back-up plan (the “survival plan”), take a whack at expenses wherever and whenever possible (hey, shouldn’t we be doing that all the time anyway?), test every single assumption in our models, and perhaps think long and hard before hiring additional staff. But then we should go back to work, build amazing businesses, and remember that Silicon Valley is about the future and we’re in charge of creating it.