Web 2.0: Rest in peace

Sequoia Capital this week held a sobering wake for the second Internet boom.

Call it Economics 101 on Recession 2.0. The premier venture capital firm, which has backed such companies as Apple, Cisco and YouTube, invited about 100 executives from its portfolio companies to give them an overview of what the global economic crisis means for Silicon Valley and their start-up dreams.

"We were all talking outside before it got started and one of the CEOs said, 'Gee, I wonder what they are going to talk about at the meeting today?' So we peeked in and there was a tombstone that said 'RIP: Good Times' on it," said one executive who asked not to be named because the meeting was confidential.

The main message: Cinch your belts for a much longer and deeper recession than most people think.

"They gave us a macroeconomic overview of what they see happening and why they don't think this is just some volatility," the executive said.

Sequoia partner Michael Moritz, who led the firm's early investments in the likes of Google and Yahoo, gave an introduction at the meeting. Earlier this week, Moritz made clear his feelings about how sharp the retrenchment would be for Silicon Valley start-ups that sprang up during the boom. Many will end up "spattered on windshields and radiator grills and be forgotten," he told the Financial Times.

Sequoia declined to comment about the Tuesday meeting, which was first reported by technology blog GigaOm.

It was not a "doom and gloom" message, the executive said, but a serious one. "They basically said: 'This is a business. This is not an excuse for you and a bunch of your friends to have a pool table and goof around with something you think is neat.' I didn't come away thinking that the sky is falling or that I have to move to Canada, just that these guys are taking this seriously."

Sequoia offered practical advice on how best to ride out the economic storm. It even had an entrepreneur it funded in the first Internet boom speak about how he managed to cut costs and eventually sell his company during the dark days of the dot-com bust. The meeting covered every area of business and how best to cut costs in hopes of surviving as long as possible. Among the recommendations: If you need to conserve cash, lay off as many staff as possible in one fell swoop. If you need to raise money, raise it immediately.

Of course, ex-PayPalers Max Levchin and Keith Rabois of Slide figured that out back in January. They turned to Allen & Co., the uber-connected investment bank, to help raise $50 million from the likes of Fidelity and T. Rowe Price at a heady $500-million valuation, giving the San Francisco Internet start-up plenty of money and time to ride out the economic storm. Another seasoned entrepreneur, Netscape Communications founder Marc Andreessen, in April raised $60 million for a $500-million valuation.

This week's meeting would have felt familiar to Internet veterans: Sequoia held a similar one with its portfolio companies during the dot-com bust.

"One good thing they said is that last time the downturn started in Silicon Valley so Silicon Valley was less than well-prepared to handle it," the executive said. "This time it started in New York. We have more time to prepare for it."

What's clear: The party is over, and the shake-out has begun. Silicon Valley likes to say that the best companies thrive in the worst of times. And that's the reality: Prepared or not, many companies won't make it.

-- Jessica Guynn

Photo: Keith Rabois of Slide helped raise $50 million for his company, Slide, to ride out the tough economy. Credit: Jakub Mosur / For the Times

Comments

[Ian Hendry]

"Web 2.0" has been a bandwagon that many people have leapt on what seems a journey directly from the Dot Com Boom of 8 years ago. In spite of running a social networking business myself I have long believed this bandwagon is on a return journey.

The problem is that no matter what the hype, it is indeed surely Economics 101 that you need to have a solid plan for revenue and profitability; and revenue doesn't mean finding gullible VCs to continue to line your pockets on the basis of shaky predictions.

In the past week I have heard board members of Facebook and Twitter say they are not interested in getting revenue. In a week that has seen one of the most economic meltdowns in 75 years that strikes me as highly irresponsible and if I was a shareholder I'd be tearing my hair out. That isn't business and if those are their plans, why not de-register the company, close the offices, de-register for tax and just run it as a hobby with next to no costs.

With these guys as the poster children for the Web 2.0 generation of "entrepreneurs" it goes without saying many are going to take a real hiding over the coming years as their house of cards business plans collapse with no interest from people willing to keep the servers switched on and the coffee flowing for no obvious return.

We have a very solid plan behind WeCanDo.BIZ, which features both a compelling proposition for customers and a revenue stream based on nothing BUT our customers. I think we are well set for a storm, but I kind of relish seeing how the land has been cleared when we get to the other side.

Ian Hendry
CEO, WeCanDo.BIZ
http://www.wecando.biz

[Jason Cianchette]

Startups with ad supported models are likely to face some tough times during the next few years. Many of them weren't making much money before and now advertising spend is likely to decrease.

However, startups with more robust subscription based models like Hubspot.com and Care.com may fair far better.

Jason Cianchette
http://liquidwireless.com

[Julie Parrish]

As much as there are days when I think it would be nice to have a the VC to fund our business, it's time like now that I'm really glad our company is debt free, in a cash-positive position, is topical to the current economy, and growing like a weed. I think you can be web company that's true to your audience as long as you're willing to ask the hard question - "How much is enough?"