Financial Crisis Impacts Startups

With the IPO market bleak and venture capital scarce, innovative new companies are running low on cash.

I have subscribed to BusinessWeek for a couple of decades now and I have always regarded their analysis quite highly. (I must admit that my wife is a much more avid reader of it than I – reading it cover-to-cover every week) I prefer the Wall Street Journal for daily news but read a couple of leading BW articles each week (usually at the behest of my wife). This week’s BW has a great article on Startup funding and the problems generated from the dearth of IPOs this year:

Exit Options Dry Up

It’s a high-stakes gamble that’s being played out at thousands of startups across the country. The crop of innovative companies that venture investors helped build in recent years now finds that they can’t go public or even sell out in an acquisition. In the third quarter, only one company backed by venture capitalists went public, and the value of all mergers and acquisitions fell 65%, to $4.4 billion, from the year-earlier quarter, according to Dow Jones VentureSource (NWS). As exit options dry up, the fear is that a capital crisis could undermine American innovation.

In recent weeks, a number of prominent venture firms have begun advising their portfolio companies to cut expenses and lay off staff. Sequoia Capital, the Silicon Valley firm that funded Apple (AAPL) and Google (GOOG), gave its current crop of startups a bracing presentation that included one slide with the words “Death Spiral” and a skull-and-crossbones to signal the fate that awaited companies that didn’t take quick action.

The Sequoia Capital slide deck was posted on Venture Beat and can be seen below courtesy of VB and slideshare.net :

Adam Grosser, general partner with Silicon Valley’s Foundation Capital, sent an e-mail to his companies stressing the importance of cutting back. “I think we all need to review staffing levels—and make sure that every hire is absolutely crucial, or to see if there are opportunities for reductions,” he wrote.

Some venture-backed companies are starting to close their doors. Recently the music site Social.FM and travel planner TripHub have shut their Web sites. “In the next six months you’ll see a lot of companies go down,” says Ted Wang, a lawyer at Silicon Valley’s Fenwick & West who works with emerging companies and venture firms.

Some startups are battening down the hatches. Gigya, an Internet startup based in Palo Alto, Calif., just scratched plans to open an office in Europe. It also raised $11 million in September on top of the $9.5 million it pulled in six months earlier. “We have air for three years now,” says Rooly Eliezerov, co-founder and president of Gigya. “Nobody will be looking around for another job.” . . . click here to read more