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.