Reality bites: The Silicon Valley edition

The perks aren't what they used to be, as tech companies adjust to a new view on business after lavishly spending as startups

Reality bites: The Silicon Valley edition

A new mood is at work in Silicon Valley. Stories about lavish employee perks have given way to tales of belt tightening -- perhaps none so fascinating as the recent mea culpa from Dropbox when it unveiled a gleaming 5-foot-tall chrome panda statue in its lobby.

In a disclaimer accompanying that $100,000 monument to hubris, Dropbox wrote:

When it comes to building a healthy and sustainable business, every dollar counts. And while it's okay for us to have nice things, it's important to remember to ask ourselves, 'would I spend my own money this way?' We're keeping the panda as a company-wide reminder of the importance of both our past and future in thoughtful spending.

But before you start humming "The Times They Are A Changin'," bear in mind (pun intended) how far Silicon Valley has to fall before entering the realm of reality where most of us live.

Perks had been costing Dropbox about $38 million a year -- roughly $25,000 per employee per year. Thus, the company cut the free San Francisco shuttles and laundry service, pushed its dinner service back to 7 p.m. (to encourage longer work hours no doubt), and capped the monthly number of guests allowed at its free food service and open bar Friday happy hours.

Oh that life was so tough for the rest of us.

Party over?

While the first three quarters of 2015 saw record levels of funding in startups -- and record levels of burn rates by companies awash in capital -- the gravy train began to slow in the fourth quarter. This year the flood of companies joining the Unicorn Club has slowed to a trickle, and downrounds have risen sharply -- so much so that CBI Insights added a downround tracker to identify "the wounded companies of the Unicorn era."

At's Emerging Technology Summit, Mark Iwanowski, CEO and founder of MDI & Associates, told InfoWorld's Eric Knorr: "There are 150 unicorns, or companies valued at greater than a $1 billion, and there are projections that a third of them will go bankrupt within 18 months because they're burning [through capital] at such a rate that they don't have sustainable [business] models."

Many companies have begun to curb their burn, but cutting perks is often not enough and layoffs have resulted. "Many modern entrepreneurs have limited exposure to the notion of failure or layoffs because it has been so long since these things were common in the industry," venture capitalist Bill Gurley says.

An era of easy money has made many feel immune to the natural fluctuations of economic cycles. They have forgotten that failure is the norm for startups. "It turns out that very few people can build transformative and disruptive companies that are worth billions of dollars," Keith Rabois, a partner at VC firm Khosla Ventures, told Business Insider. "A lot of startups fail. That's part of the business. It's very difficult."

To succeed in these leaner times, companies will need to take stock whether there is a big enough customer base to build a sustainable business. Aaron Fulkerson, CEO and founder of MindTouch, told Knorr that at investor conferences this year, he was shocked to see "the people that are on stage, that are telling people how to grow their business, that have raised $100 million in capital -- they're doing less than $7 million annually in recurring revenue." 

In this new climate, "you can't burn $1 million a month to chase $200K in revenues," Will Kohler, partner at Lightspeed Venture Partners, told Knorr. "Anyone who's built a business [knows] constraints are a really good thing. It forces trade-offs, it forces tough decisions. When you don't have constraints, you end up here."

Saying good-bye to the free massages and on-site barbers would be a small price to pay, if what Gurley calls "voraciously hungry Unicorns" are wising up, going on a much-needed diet, and returning to business basics.

The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices. More money will not solve any of these problems -- it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.