VC-backed cos. make cuts to survive

Hope springs eternal in Silicon Valley. Or it did until recently.

Now, layoffs at tech companies both big and small are piling up, and many are wondering how much worse it might get.

It’s an enormous problem for those trying to run venture-backed startups. Already this year, at least eight high-profile venture-backed startups have shrunken their costs by laying off employees. Though no one wants to make more cuts, many startups may be forced to or else run out of runway.

“We don’t think there’s a company in our portfolio that isn’t being negatively impacted by the greater economy,” says Mitchell Kertzman, a managing director at the San Francisco-based venture firm Hummer Winblad Venture Partners.

Worse, says Kertzman, the fund-raising environment for follow-on rounds gets tougher by the day. It’s why, he says, “our assumption is that it’s going to be harder for our companies to raise their next round no matter what, and why we’re urging everybody to extend their cash flow.”

Kertzman says that occasionally, startups can shave costs by negotiating with a landlord, or taking advantage of bargains that are available elsewhere.

Still, Kertzman adds, “We invest in software, and in software most of the money is going to headcount. If you want to make a difference, that’s where you make it.”

Among the companies that have made cuts are, which operates an online marketplace to makes custom T-shirts and other products for customers. It laid off 38 employees, or 15% of its staff, in late January. Earlier in the month, photovoltaic cell maker OptiSolar laid off half of its staff, or 290 employees.

Dozens of other venture-backed startups began handing out pink slips last fall, when the economic crisis began to kick in worldwide. Spurred in part by a now-famous presentation of Sequoia Capital, in which it told its LPs and portfolio companies to brace for the worst, a flurry of layoffs followed, including at social media company Gaia Online, which cut 13% of its staff; the online video platform company Brightcove, which cut 15%; and electric car company Tesla Motors, which cut 18 percent.

As many startups look at their balance sheet to see what else can be trimmed, the answer for many will undoubtedly be more employees.

Blog search service Technorati cut 6 people, or 11% of its staff, in November. Additionally, its employees took a 10% pay cut while executives took a 15% to 25% pay cut. The company also passed on a chance to move into nicer offices, and it has replaced a weekly tradition of providing hearty appetizers and beer to employees every Friday afternoon at a cost of $100 with $50 in chips and salsa and beer once a month.

Without more fat to cut, the “only thing left [to cut] would be people,” says CEO Richard Jalichandra. “I don’t want to give the impression that we’re doing more layoffs. We’re actually enjoying modest [revenue] growth. But it’s always in your pocket if necessary. The math is really simple.”

It’s not a choice that CEOs enjoy contemplating, with some even arguing that more cuts could be counterproductive. Scott Rafer, CEO of Lookery, a startup that helps site owners evaluate their user data, and an advisor to numerous other startups, argues that his company is already at the “minimal level at which we can actually build a company. I think a lot of people are now at that level, too.”

Similar to Jalichandra, Rafer says that Lookery is doing OK. It’s growing contracts and getting its invoices and that its trajectory “feels reasonably appropriate.” At the same time, Rafer says that if he were forced to cut anyone on his nine-person staff, “I’m not sure what we could deliver to customers.”

CEOs could “figure out how to cut more,” says Rafer, but startups “aren’t about survival for survival’s sake. You could slash your way to two employees and survive with five years of money in the bank, but that’s not building anything. That’s social security.”