open source software, which is increasingly sophisticated; cloud computing, which allows companies to outsource their entire IT infrastructure; and social media like Facebook and Twitter, which provide free viral marketing platforms.
Raising less money would lead to a healthy lowering of expectations when it comes time for a company to exit and pay back its investors, said Jeffrey Anderson, former CEO of Turbine and the CEO and founder of new sports video game startup Quick Hit. Many VCs overfund startups based on inflated hopes, he argued. “How many people are going to buy a $400 million business?” Anderson asked. As companies raise more, he said, their odds of a successful exit “go down, not up.”
“So, are companies going to raise less money, or are VCs going to take lower returns?” Landry asked Anderson. “Both,” he answered.
It’s a time of increased friction, even occasional animosity, between entrepreneurs and venture capital partners. With capital flowing less freely, some entrepreneurs think venture firms need to fess up about where their interests lie, and how much tolerance they have for risk. Vertica’s Palmer said VCs need to be more transparent about the fact that they are out to make money for their limited partners—not to cultivate successful entrepreneurs. He also accused the venture community in general of failing to support early-stage companies as faithfully as it professes to. Flybridge’s Greeley said he “violently disagreed” with Palmer. “We make money when entrepreneurs make money,” he said.
Venture-backed companies are proactively downsizing—but at least some are trying to do it humanely. Aron Ain, CEO of Chelmsford, MA-based Kronos, told an eye-opening story about his company’s strategies for dealing with the downturn. Ain said Kronos, which makes workforce management software, realized by September 2008 that revenue would be down by some 20 percent in 2009, so the company made plans to eliminate 300 out of its 3,300 positions. “We had to size ourselves to the market,” Ain said. The company’s strategy was to “over-communicate” about the downsizing strategy and to handle the actual layoffs as gently as possible, even providing “hall monitors” whose job was to help the individuals affected pack up their offices. “We knew we were going to be throwing people into a very difficult economy, so we upped severance pay by 25 percent,” Ain added.
But the layoffs were also cleansing for the company, Ain said. “Bluntly, there were people in the company who had lost their edge” and wouldn’t be hired if they were applying today. And it’s far better to cut dead wood than to cut salaries or bonuses, he said. “You have to pay a fair wage or some other company is going to offer one,” he said.
Christopher Zannetos, CEO of Framingham, MA-based Courion, agreed with Ain. “You have to think about people who remain,” he said. “A 10 percent pay cut puts stress on every employee you have. If you cut 10 percent of your employees you are confining the stress.” Zannetos said Courion stuck to its policy of “ruthlessly rewarding the high performers,” even when it’s meant cuts in other areas.
In the new economy, we need to build things, not just finance them. Eric Janszen, the founder of financial news website iTulip.com and author of the forthcoming book The Post-Catastrophe Economy: Rebuilding After the Great Collapse of 2008, gave an illuminating, largely depressing, but somewhat hopeful talk about the policies that got the world economy into its current mess. He said the U.S. has, since the 1970s, developed a “FIRE” economy—one dominated by
