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Layoffs In Venture Capital

I just got off the phone with a friend who is founder/CEO of an early stage medical device company.  His company is doing well and recently received a couple of term sheets for his first institutional round.  As he was going through the process of negotiating with the potential investors, he said they were trying to set his expectations low.  He told me a story about how one investor recounted tales of startups making mass layoffs, cutting back everywhere and generally dire conditions (basically sending the message that he should be happy to be getting an offer).

So my friend responded, “Wow, that sounds terrible.  This must be really affecting you badly…how many people have you had to layoff here?” The VC stared at him with a bewildered look.

But it’s not so far fetched though that layoffs will soon be coming to venture capital.  We’re already starting to see layoffs at the large private equity funds where Blackstone, Carlyle and American Capital announced staff cuts between 7% and 19% in December.  A survey of 400 venture capitalists found that 60% predicted a drop greater than 10% in 2009 venture funding (below I’ve embedded the full presentation).  The take away here is expect to see cuts of at least 10% in 2009.  Those first to be cut will be the associates and principals at the larger funds, but expect to see some partners leaving as well.

What does this mean for entrepreneurs and is there anything you should be doing to prepare?

The worst situation is if you have a partner on your board and that person leaves the fund and is replaced by an associate or principal.  That means your board member (i.e. your advocate within the fund) will have a hard time supporting you (heck, they won’t even be invited to the partner’s meeting where funding decisions are made).  In this scenario you want to fight hard to get an “upgrade” to a partner and talk to your other board members about whether you can downgrade the offender to an observer (or kick them off the board all together) if you’re stuck with a junior person.  Your other remaining VC board members will have aligned interests with you on this and may even see it as an opportunity to cramdown the offending investor.

The other more proactive thing you can do is to develop relationships with other partners at the fund (other than the one who sits on your board).  My own experience was that I would meet with partners other than my own usually just once per year which is what will happen if you’re not proactive.  Having relationships with more than one partner will help you have a “plan B” in case your current partner leaves but it’ll also help you in other ways (like being more of a known quantity when discussions about funding come up).  People are always kinder to someone they know than just names on paper.

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Categorised as: Venture Capital

  • reiboldt

    Of course there will be job cuts in venture capital – there are cuts across the entire financial sector. It is no surprise Blackstone, Carlyle et al are making cuts; they are now the new Wall Street firm. VC funds are different; their entire make-up and structure is totally different from the large buyout funds. So yes, there will be some cuts in the Valley, but probably not how you describe. Yes, some associates, analysts and principals will go. But, partners are different; they typically have a more fixed stake in the fund and therefore they are often legally tied to the companies they’re invested in. Further, the assumption about passing on board seats to lower levels isn’t very likely either. It will do a fund no good to forget about companies that they are still interested in, therefore, they won’t just forget about you. However, if you notice a decline in focus from your investors, perhaps they’re changing their attention and placing it elsewhere. So, everyone will suffer from this downturn. The last thing entrepreneurs should be thinking about are the job cuts in venture funds.

    • http://www.altgate.com/ fnazeeri

      You are right that later stage PE funds have a different “structure.” Later stage funds have many more associates than VC funds. My friend Prof. Noam Wasserman wrote on this. So there are fewer junior staff to axe in the venture world which likely means that partners are more likely to get cut. Many 2nd and 3rd tier VC funds will see partners with 5, 6 or more of their companies implode leaving them with just 1 or 2 companies of hope and a lot of clean up. Pretty quickly the partnerships will decide that it’s more effective to part ways than limp along. Now it’s possible that it may all drag out into 2010, but the fact is 10%+ of VC partners will be leaving the business.

      • reiboldt

        I’m not necessarily disagreeing with you, but I think the caveat here with partners in venture funds is that there typically is more of a legal tie between the partners and both the fund and the companies they are associated with. Many partners at large venture funds, such as DFJ’s network, etc almost act as independent investors that manage a book of capital (which typically includes some of their own capital alongside their LP’s). So, the firm per se often doesn’t have any real leverage to “cut partners”. They also typically have a percentage of the fund’s carry and rights to profit distributions, etc. Venture fund partners’ compensation is typically quite diverse and can be very complicated, so again, I don’t think you’ll see partners getting cut en masse, because the relationship there is often too complex. Now, analysts, associates and principals will likely get cut, but those people typically act as staff in the funds. Most people don’t realize how many venture funds are made up … they are not your typical corporate structure and they aren’t even similar to that of what you see in the large buyout shops. They are very individualistic. I think this is part of the reason why the model is vulnerable to breaking, because many VC’s get a little too much control and there is very little oversight of the actual fund (i.e., the classic question in financial economics of “who monitors the monitors?”).