Zivity and other start-ups lay off workers to ride out economic storm

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For the last few years, they couldn’t hire fast enough. Now, with the financial crisis spreading a pall over Silicon Valley, Internet and software start-ups are shedding workers to prepare for the ‘nuclear winter’ that Marc Andreessen forecast in April.

Last week alone, there were layoffs at Zillow, Pandora, AdBrite, Hi5, Jive Software, and Redfin. Rumors of more cuts abound. TechCrunch is tracking the layoffs.

And venture capital investment has already started slowing. In the third quarter, the number of investments in information technology companies fell to dismal levels not seen since at least 1997, according to a report Saturday by Dow Jones VentureSource.

What a comedown for the bubbly Web 2.0 scene that produced, for a time, a seemingly unending stream of start-ups loaded with ideas (both good and bad). The companies attracted fortune seekers and brain power from around the country. Now start-ups are taking a hard look at their odds of surviving a prolonged recession, and the smart ones are going on a major diet. It’s a healthy dose of fiscal realism -- and a departure from the dot-com excesses that ultimately led to an epic failure rate for Internet start-ups.

Last week, Seesmic laid off a third of its staff. Founder and CEO Loic Le Meur, clearly shaken, made the announcement through his video commenting service. He later said in an interview that the cutbacks, while extremely painful, would add another year of life to his San Francisco company. Investors, which include EBay co-founder Pierre Omidyar, agreed with Le Meur that Seesmic should save as much money as possible.

‘We had two years of runway, but I wanted one more year because the recession is going to make it much tougher to get revenues,’ Le Meur said. ‘It’s like giving myself another round of funding.’

Another company slimming down in a big way is Zivity, a subscription-based adult social network.

The sexy San Francisco Internet start-up has always been an attention-getter. It was formed by ...

... serial entrepreneur Scott Banister (also a prolific investor who has backed the likes of Facebook, Hi5 and Powerset and sits on the board of Slide) and wife Cyan. It features tasteful photos that are billed as promoting female beauty and artistic expression (think women, including Cyan, in various stages of undress).

Unlike many in the current Internet boom, this site has no advertising. For $10 a month, members can view and vote on the photos. Each vote delivers cash to models and photographers (60 cents for models, 20 cents for photographers). Casting votes also allows members to get updates from the artists. Members get five votes with their monthly subscription and frequently buy more to act as patrons of the arts, Cyan said. The Banisters like to say that it’s a cross between Playboy and ‘American Idol.’ There are ground rules: No naked men, no sex acts, no extreme close-ups. Models must prove they are over 18.

Some of Zivity’s top models (such as Pearl, pictured at right) have become big hits on the high-tech party circuit, as the Crunchies, TechCrunch’s annual awards, show. But now it’s Zivity that is taking a hit, joining the ranks of start-ups downsizing to make the money they raised from now skittish venture capitalists last longer.

It was a difficult but necessary decision, say the Banisters, who are seasoned technology professionals. They have experienced the industry’s ups and downs before.

Scott dropped out of the University of Illinois at Urbana-Champaign to start a Web advertising company that he later sold to Microsoft. He co-founded spam-blocking company IronPort, which Cisco Systems bought last year for $830 million. That’s where he met Cyan, who managed IronPort’s blacklist of spammers. Together they came up with the idea for Zivity, which they launched in February 2007. They raised $8 million in two funding rounds from investors such as BlueRun Ventures and Founders Fund.

But, with the slowdown in consumer spending and with venture capitalists zipping up their wallets, the Banisters took a realistic look at their start-up’s finances. The Banisters wanted to make sure they had enough cash to remain in business as they prepare to open up to the public early next year and broaden into a place for artists of all kinds to strut their stuff. So they made the tough decision to cut eight out of 22 employees.

‘We did an internal budgeting exercise to stretch our cash into 2011 and presented it to the board,’ Cyan said. ‘They were very pleased that we were proactive.’

The decision weighed on them but the Banisters felt they had no choice, Cyan said. They are just one of many Internet companies battening down the hatches.

‘I am glad companies are making this decision now because the companies who are doing it now have a chance of surviving.’

— Jessica Guynn

at August Capital in July. Credit: Brian Solis via Flickr