Scaling back at Web startup firms could be proactive

By Verne Kopytoff, San Francisco Chronicle

Published October 21, 2008 at 12:05 a.m.

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Air is starting to leak from the Internet startup bubble, underscored by a wave of layoffs amid the slumping economy.

The job cuts signal an abrupt reversal of fortune for an industry that until recently was flush with investor money and extravagant employee perks.

The question on virtually every startup executive's mind is whether the retrenchment is a minor blip or a repeat of the dot- com implosion eight years ago, when sites such as Pets.com, Webvan and eToys all went belly-up.

So far, most agree that the cuts are proactive rather than a sign of immediate distress. By paring back early, they say, the companies will be able to survive longer if it becomes too difficult to raise more venture capital down the line.

"The lesson we learned in 2000 was that the companies that cut deep and cut early are more successful," said Randy Adams, chief executive of Searchme, a Mountain View search engine that recently cut 11 jobs. "I'm encouraged that there will be more companies that emerge from this, versus the dot-bomb time."

Joining Searchme in eliminating staff over the past couple of weeks were video comments site Seesmic (seven employees), online advertising network AdBrite (40 employees), music site Pandora (20 employees), adult photo site Zivity (eight employees) and social network Hi5 (12 to 18 employees).

Many more companies are expected to join the list.

Even in the best of times, Internet startups are a risky business.

Failure and job cuts have become an accepted part of the evolutionary cycle at Silicon Valley.

With the economy souring, startups expect it to get more difficult to raise rounds of venture financing, the lifeblood on which many profitless companies survive.

In fact, some Web sites don't have any revenue - a detail that didn't seem to be too much of a problem back when luring more users was the primary goal.

Venture capitalists including Silicon Valley stalwarts Sequoia Capital and Benchmark Capital have issued ominous warnings to their portfolio companies about the tough times ahead, coupled with advice to reduce spending.

Frugality is the new fad, even if it means dispensing with many of the comforts that have become synonymous with startup culture.

For instance, free daily lunches, massages and gym memberships were eliminated at Searchme this week.

Job cuts aren't limited to the Internet's small fry.

Yahoo Inc. is drafting significant cost-cutting plans to try to reverse its fortunes from the inside.

The Sunnyvale, Calif., Internet company is expected to disclose the cost cuts as soon as Tuesday, when it reports quarterly earnings, say people familiar with the matter. The cuts will involve layoffs, among other things, these people say.

The exact number of jobs to be eliminated remains unclear, though it is expected to exceed the 1,000 jobs that Yahoo announced it was cutting in January, say people familiar with the matter. Yahoo had 14,300 employees as of the end of June.

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