The game has changed.
In April, venture capitalist Bill Gurley wrote an essay crystallizing what many VCs had been talking about for months.
Essentially, too many companies have taken too much money at unsupportable valuations. A lot of the money they raised came with huge caveats that would protect late-stage investors.
A lot of these businesses now have limited options, Gurley wrote. They can't raise more money from the private markets because their last rounds came with such strict conditions. They can't go public because their numbers aren't good enough.
Keith Rabois, a partner at Khosla Ventures, says:
In the steroid era of baseball, a lot of people were hitting 30 home runs and the perception was that wasn't that difficult. Well the reality is almost no one ever hits 30 home runs without using special supplements and the same thing is true [for startups]. And as you deprive companies or take away the steroids, it turns out that very few people can build transformative and disruptive companies that are worth billions of dollars.
So what happens next?
Business Insider spoke to eight leading venture capitalists about what the tech landscape looks like from their point of view — and where startups go from here.
The answer involves a lot of pain for founders, employees, and investors in the years to come.
Some founders will find that their VCs aren't so supportive anymore.
For the last few years, money has been easy to come by in Silicon Valley. Venture capitalists have been raising huge funds and have the capital to deploy. But now that startups are staying private longer, investors are faced with a choice: Do you put in more money to get a company off life support, or do you invest the same amount in a new company?
A lot will choose to pass the next time around:
I wouldn't say the easy money's gone, but the price of oxygen has increased. —Keith Rabois, Khosla Ventures
For a really really long time the VCs have been saying, "Oh, we're super founder-friendly, we're always going to support you." You've seen a lot of different funds tell the entrepreneur, "Hey the next round of financing we'll do a pro rata, but you've got to go get it."—Semil Shah, Haystack
Maybe we felt like the consumer pain point was so huge, and the potential for it to grow explosively high, so we might have overlooked unit economics ... Where today, we are focused on the unit economics/gross margin question. —Nikhil Basu Trivedi, Shasta Ventures
The venture community has realized that a number of companies were funded at valuations that were far ahead of their fundamental progress as businesses, and that some of those companies are not actually that great fundamental businesses. —Alfred Lin, Sequoia
The success of companies like Facebook and Uber has created an obsession with fast growth in the Valley, and investors are largely to blame. Overfeeding a startup leads to poor decision making, because too much capital means startups don’t need to prioritize. —Mamoon Hamid, Social Capital
Expenses will be slashed — including head count.
Startups have been told to curb their burn, or how much money they spend each month. While some companies have cut visible perks, like house cleaning or free food, much of the reduction will come from laying off employees.
I know for a fact that — I think this is a good behavior — many, many companies in January, February, and March, basically got the s--- beat out of them by their investors. And reduced burn. I heard from a few CEOs that they almost reduced their burn by 60 to 70%. —Semil Shah, Haystack
I was talking to this exec from a company I won't name, it's one we're not in, she came from out of the area and had been at a big company somewhere else and was brought in to run human resources. And they had an Omelette station in the morning. The revenue model wasn't working, and there's 350 people. —a major Silicon Valley investor who requested anonymity for this article
The more impactful decisions if you look at burn are not food every day, they're people. So you start thinking about where do we trim? Where do we have fat in our organization? And the first to go is the trimming of the fat. Then in some cases, to make the business work, you have to go deeper into the muscle, and all the way close to the bone. —Nikhil Basu Trivedi, Shasta Ventures
One of the bigger costs with most of these businesses is people. Compensation of employees. That's a very hard lever to change. At some point perhaps salaries and comp-cash competition go down, but right now that's almost difficult to fathom. The second big cost is often real estate, office space for all these people. That's subject to a little more short-term market winds, and there's some corrections going on right now in commercial real estate in the Bay Area. But it would have to go down by another 30, 40, 50% to have a meaningful effect on many companies' burns. —Keith Rabois, Khosla Ventures
Some companies will fold.
As the pendulum swings from growth at all costs to building a sustainable business, some companies will get caught and die. If they can't show that their business can make money and are burning through much cash to not give a company time to correct it, then they won't survive the industry shift.
A number of companies will fail because they won't be able to raise a next round, they're just not great businesses, they're being outcompeted, they're losing money on every order. —Nikhil Basu Trivedi, Shasta Ventures
You haven't seen an avalanche of failures, but I think the percentage will be increasing. If you say there are 100, 150 companies, private, high valuation, a lot of capital, at least half I would say will end in unhappy outcomes. The other half may be spectacular successes ... One truly spectacular success does trump a lot of failures. I don't know that it's bad for venture investors, as long as you have a few of those big successes in your portfolio. That said, most investors don't, and can't. —Keith Rabois, Khosla Ventures
See the rest of the story at Business Insider