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Sequoia Capital, which provided early funding for such web stars as Google and Yahoo, told executives of companies it invests in to tighten their belts because more capital is going to be hard to come by.
In Silicon Valley, when Sequoia Capital speaks, people listen.
And what the influential venture capital firm is saying is that tech companies, including online retailers and the their technology providers, had better reach the breakeven point quickly, because new capital is going to be hard to come by. For all Internet merchants, that underscores the importance today of taking a close look before contracting to use the services of any vendors who are relying on venture capital to survive, a Forrester Research analyst says.
“Companies evaluating vendors need to vet the financial stability to a greater degree than they may have in the past,” says Brian Walker, a senior analyst who covers e-commerce technology at Forrester. “Press vendors on disclosing their financials. Vendors who are not yet profitable and who are reliant on achieving scale may be much more challenged.” In addition, Walker says, companies that still require infusions of cash “may be challenged to deliver new features, to scale, and to support their customers at their desired rate.”
Sequoia summoned executives of companies it invests in to a meeting this month to deliver its message that the economy is not likely to turn around quickly, and that companies must become financially self-sustaining quickly, or die. The Sequoia presentation, which is circulating on the Internet, included such bullet points as “cuts are a must,” and “need to become cash flow positive.” It suggests companies take a look at the next versions of their products to determine which new features are essential, and which can be delayed-thus reducing spending.
Sequoia’s opinions count more than most, because the venture capital firm has invested in such Internet giants as Google Inc. and Yahoo Inc., as well as in online retailers like Zappos.com Inc., No. 27 in the Internet Retailer Top 500 Guide, No. 82 NetShops Inc. and No. 118 CafePress.com, and such vendors to e-retailers as MarketLive Inc., StrongMail Systems Inc. and Progress Software Corp.
Sequoia’s aim was to wake up the entrepreneurs in the audience, who tend to be optimists, to the seriousness of the economic situation, says Mark Pierce, CEO of e-commerce platform provider MarketLive, who attended the meeting along with scores of other executives. “People need to know they’ve got to have a business model that’s self-sustaining,” Pierce says. “This is not going to be a two- or three-month cycle.”
Pierce says companies that continue to burn cash will run out quickly and disappear. A vendor’s financial stability “will be a huge buying factor going forward,” he says. MarketLive has twice reduced its headcount this year “to keep our resources in line with our business structure,” while hiring in certain areas, such as professional services. He noted the company’s recently released platform, version 5.5, was designed to integrate closely with technology from such vendors as analytics provider Omniture Inc. and site search specialist Endeca Technologies Inc., reducing MarketLive’s need to invest in developing technology in those areas.
Alfred Lin, chief financial officer and chief operating officer at online shoe retailer Zappos.com, who also attended the meeting, says Sequoia sent a message that “this recession is going to be much harsher than previous ones.” While agreeing in general with the message, Lin says it will have the most impact on early-stage companies that are not breaking even from operations.
“We have run the company at break-even for a long time, even during the early days, and for the last few years we have managed to make annual profits,” says Lin. “The presentation reinforced our concerns, but it hasn’t really changed the way we are doing business.”
Walker, the Forrester analyst, says demand for e-commerce technology remains strong, despite the financial crisis. He advises caution when working with vendors backed by venture capital, but adds, “If you are working with established, profitable players my suggestion is to monitor, but not fret. Their business likely remains strong, despite the macro problems with the economy.”