When tech startup Appthority was looking for new office space early last year, Domingo Guerra suffered a bad case of sticker shock. Landlords were demanding steep terms. High rents. Large security deposits. Five-year commitments.
So Guerra, the president and co-founder of the well-funded mobile app security company, said they made a more pragmatic decision. Appthority instead chose a co-working space in San Francisco.
“After we made the move, our Realtor said that several other clients were doing the same thing,” Guerra added. “Everyone realizes that it’s becoming easier to not spend money than it is to raise money, especially when the investment climate looks to be slowing down. Companies are becoming more cautious.”
Appthority recently was highlighted in a Los Angeles Times article as a prime example of Silicon Valley’s new-found appreciation of frugality in a time when venture capital has dried up. There has been a steady stream of media stories about a nose-dive in funding and an evaporating tech IPO market. Meanwhile, the warnings continue about the fragile health of the unicorns — companies with a paper value of $1 billion or more. So it’s no wonder that tech startups are cutting back on perks and tightening belts.
None of this is a surprise if you have been paying attention. It’s why LeanData explored the cloudy forecast for tech last year in a blog series called “The End of Growth at All Costs.” Even the idea of the “unicorn” feels so 2015. Smart companies today are being compared to a far less adorable creature — the cockroach.
“Everything is about resiliency now to weather the storm,” Tim McSweeney, director at Restoration Partners, recently told Business Insider. “Unicorn, it’s a mythical beast, whereas a cockroach, it can survive a nuclear war.”
It’s hardly armageddon that startups are being forced to focus more on generating revenue. But the atmosphere in Silicon Valley is different. For instance, Guerra has noticed a change at the security trade shows they attend. Companies seem to be spending less, opting for smaller booths than they did in the past.
“I think there’s uncertainty throughout the whole tech community,” he said. “Before, everyone was bullish on the future. Right now, it’s more wait-and-see. It doesn’t mean that people are pessimistic or fearful. But they are just a little bit more conservative.”
Suddenly, burn rates matter again.
Evan Liang, the chief executive officer at LeanData, worked in venture capital before becoming an entrepreneur. As last year progressed, he saw investors shifting away from month-over-month growth as the key benchmark they wanted to see from startups.
“In the growth-at-all-cost phase, you never had to worry about making your business more efficient,” Liang said. “You just threw more money at the problem. But when companies are resource-constrained, you have to do more with less. Previously, it was just one metric: growth, growth, growth. Now there’s the understanding that other pathways to success exist.”
A recent story in The Wall Street Journal about how slowing sales of ping-pong tables was a sign of the cooling tech economy resonated with Liang. Last fall, he decided to consolidate the two company offices into one. The ping-pong table was folded up.
“We were a ping-pong culture here,” Liang added. “But I think it’s an example that the days of renting larger spaces just so you can grow into them are over. Our attitude now is that we have to be bursting at the seams before we expand.”
In fact at a time when much of Silicon Valley is bracing for a chill, LeanData has seen Annual Recurring Revenue jump four-fold. Liang said that’s partly credited to “eating our own dog food” by using LeanData’s analytics products that help make sales and marketing teams more productive. That’s the template — capital-efficient growth — startup investors are now expecting, he added.
LeanData customer Invoca, a call-intelligence platform for marketers, was another company cited in the Los Angeles Times article for having a philosophy that fits the new times in tech. Invoca closed a $30-million Series D round in March. CEO Mark Woodward said he hopes it will be the last time the company needs funding.
“We’re not chasing Uber-sized top-line growth — that’s expensive and risky,” Woodward told the newspaper. “Just because we have money in the bank doesn’t mean we’re going to spend it.”
Guerra has seen both sides of the tech economy at Appthority. When the bootstrapped startup was named the most innovative company at the 2012 RSA Conference’s Innovation Sandbox Contest, it set off a flurry of investment interest. But securing a Series B round last December was much more challenging even though the company now has a proven product, patents and revenue.
“The environment is different,” Guerra said. “It took much longer. So we’ve seen the frenzy and we’re seeing the slowdown that’s now become more apparent to everyone else.”
By the way, the reaction he has received from the article has been positive.
“We’ve had a few folks tell us that it was good to see startups now acting more reasonable,” Guerra said. “Ultimately, you’re still investing in what is important — R&D, sales, marketing. But having stuff like a big, expensive office is getting lower and lower on the priority list for a company.”
At least the ones that want to stay in business.
For the previous article in LeanData's ongoing series about the changing winds in Silicon Valley, read here.
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