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published
15 May 2000
Lower your
expectations
by Dylan Tweney
Vibrations from April's tech stock shakeup continue
to ripple across the surface of the Web commerce pond.
Last week, dot coms KBKids and Alta Vista laid off about
50 people apiece. That's only 6% of Alta Vista's workforce, but
it's a whopping 30% staff reduction for KBKids. In addition, both
companies have recently delayed their planned public stock offerings
due to market conditions [1].
Alta Vista and KBKids are merely the most recent Web companies
to let staffers go -- troubled e-commerce players Value America
and Beyond.com have also pared their payrolls in recent months.
And streaming media startup Pixelon is in free-fall, following the
revelation that its founder is wanted for insurance fraud, and has
laid off almost all of its staff [2].
Fortunately for those laid off, there are probably still hundreds
of other startups eager to hire them, so I don't expect these folks
will be showing up in bread lines any time soon.
But if the layoffs are relatively small, they are nevertheless
symptomatic of a change in the economic climate. As one hedge fund
manager said in the article above, "The money spigot has
been shut off by both the public markets and the venture capitalists."
Never mind that venture capitalists always maintain that they are
unconcerned about day-to-day fluctuations in the public stock markets.
VCs invest for the long term, they will tell you, and they can ride
out any temporary downturn in the market, even if it's a relatively
deep one. Don't believe it for a second: There's no question that
VCs are investing less money, more cautiously, in the wake of April's
correction.
Sure, the Mercury News just published the results of its survey
of first-quarter VC investments in Silicon Valley, and once again
the amounts of capital are breaking records. VCs poured a record
$6.13 billion into Bay Area companies in Q1; 41% of those investments
were Internet-related [3]. VC investments elsewhere in the world
no doubt broke similar records in Q1.
But that was before April.
Venture funds are lowering their expectations for 2000, and the
rate of growth in VC investing was already starting to slow by the
beginning of this year [4].
It turns out that it's not so easy to make money on the Internet.
As more companies demonstrate this simple fact -- by going under
-- investors get cautious about throwing money at just anyone with
a business plan and a smooth line of talk. (Now you've got to have
a *really* good line of talk to get backing.)
Cautious investors mean cash flow problems for startups. Without
continued investment, and with profits still a long way off, startups
have no choice but to "un-hire" the dozens or hundreds
of staffers they only recently recruited.
Sorry, folks. Check your stock options at the door; last one out
turn off the lights.
Of course, layoffs don't necessarily mean that things are going
badly. In fact, some amount of layoffs are part of any healthy economy,
Robert Reich recently wrote [5]. In other words, an efficient economy
is one where businesses actually get tested in the marketplace,
and occasionally fail. If there's *too* much capital propping up
new companies, they don't have a chance to fail -- until they're
on the public market and they can take down a bunch of ordinary
folks and their 401(k) plans when they fall.
So if the VC-backed carnival is winding to a close, maybe we can
all get back to the work of building solid businesses.
[1] Dot-com
layoffs bring unease
[2] Pixelon
issues sweeping layoffs after founder's arrest
[3] Venture
Capital Survey - First Quarter 2000
[4] Venture
Capital Expectations
[5] Pink
Slips in Paradise
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