The polarizing effect of the downturn

Saw this article in the WSJ this morning….Silicon Valley is definitely suffering right now. I live in a small town called Los Gatos, and normally it is somewhat immune from the broader economy (i.e. lots of rich people live here….I just snuck in through the back-door!). But, this time around I’ve noticed that multiple of the stores in the town have shut-down, there is empty spaces on the high street, we are seeing Short-sales and disclosures and my kids school wrote to us the other day to say that they were likely going to have to reduce their staff as property tax receipts were expected to be lower.

For the tech start-up, it seems as though you are in one of two categories. Either you (a) Have cash, make positive cash-flow and therefore you are a potential buyer of the some of the distressed companies or (b) If you don’t have or are losing money, then you are seen as a company that needs to find a buyer. Clearly I am generalizing but you can almost see it in the eyes of the investors and banks – in the first 5 minutes they are sizing you up to see whether you are a beneficiary or the walking dead.

It’s very humbling to see what is going on. Fortunately we fall very much in to the first category. We completed additional funding from Goldman Sachs in September last year and we are growing very fast and making money….that means that we are getting lots of smaller companies knocking on our door to see if they “join forces” and we may well take advantage of some of those opportunities if it can help our customers and ourselves.

Anyhow, we have always tried to run a tight ship at Nimsoft which is not always the easiest thing to do with employees “why can’t I fly direct rather than taking a connection….it’s only $500 more” but it is in times like these that everyone becomes thankful.

Anyhow…read on….

More Tech Start-Ups Call It Quits
As Funding Dries Up, Fledgling Silicon Valley Firms Are Shutting Down; Fears of Chill on Innovation


The deepening recession is speeding up the shakeout in Silicon Valley, forcing droves of start-ups to shut down or sell themselves at fire-sale prices.

Many start-ups survived last year by slashing costs and deferring development projects. But as demand for their products continues to deteriorate and funding dries up, these young firms are now running out of lifelines. Many are calling it quits, recalling the dot-com bust earlier this decade.

‘You’re going to see a major shakeout,’ says Martin Pichinson, a wind-down specialist, above. Jeff Yasuda, below, plans to shut down his music site,

In recent weeks, start-ups with names such as Attune Systems Inc. and Reactrix Systems Inc. have wound down their operations. Others including Guava Technologies Inc. have sold themselves off for sums far less than what their investors spent on them.

“Start-ups are failing faster and you’re going to see a major shakeout,” says Martin Pichinson, a managing director of Sherwood Partners, a Mountain View, Calif., firm that specializes in winding down start-ups. Since mid-January, his firm has shut down an average of three start-ups a week, up from just one or two closures a month in September, he says.

Among the companies that Sherwood is currently closing is Allux Medical Inc. The Menlo Park, Calif., firm, which made devices to treat dermatological problems, had raised more than $11 million in funding. In December, Sherwood also closed down Reactrix Systems, a Redwood City, Calif., interactive media firm that had raised more than $45 million. Mr. Pichinson declined to detail the shutdowns.

Jeff Yasuda, founder and chief executive of San Francisco-based online music start-up Fuzz Artists Inc., plans to shut down his Web site on Friday after deciding he couldn’t drive enough visitor traffic to it to make it a viable business.
Turning Out the Lights

As he winds down, Mr. Yasuda has cut his staff to four people from 12. He still has some money from investors and is working with his remaining staff to preserve a service called, which lets users share short messages about music.

“It’s just brutal,” says the 36-year-old Mr. Yasuda. “Had the markets been different, I would’ve been able to raise a lot more capital and maybe I could’ve given it more of a shot.”

The troubles aren’t limited to Silicon Valley. VuBotics Inc., an Atlanta maker of software for wireless devices, filed for Chapter 11 bankruptcy protection in November, while nTag Interactive Corp., a Boston maker of high-tech name tags, filed for Chapter 7 bankruptcy protection the day after Christmas.

That such shutdowns have reached tech start-ups shows how far the recession has spread from its Wall Street and housing-sector roots and how it now could slow innovation.

Start-ups are typically where innovative products and services are created, says Richard Mammone, a professor at Rutgers University who has also started several tech companies. In normal conditions, the market rewards the best young companies and only the nonviable ones go bust. But in this economy, “it’s not survival of the fittest,” he says.

Venture capitalists pulled back sharply in the fourth quarter as credit markets seized and stock markets collapsed. Venture capitalists invested $5.54 billion in U.S. start-ups in the fourth quarter, 27% less than the third quarter, according to data compiled by VentureSource.

Rich Brenner, who runs a Cupertino, Calif., firm that specializes in restructuring start-ups, says this downturn is hurting Silicon Valley companies differently than the dot-com bust, when Internet companies that “should have never been funded” disappeared almost overnight.

This time tech companies aren’t at the epicenter of the bust, and failures will take time to play out. Still, “the needle has shifted precipitously in the last six months and now we’re starting to see more and more companies strategically stalled,” Mr. Brenner cautions.

Attune , a Santa Clara, Calif., software maker ceased operating in December even though employees say the firm had money to keep going through early 2009.

Alan Kessler, Attune’s chief executive, says start-ups of Attune’s size are highly dependent on partnerships with larger companies and when the markets tumbled, many of those bigger companies “froze.”

As a result, Mr. Kessler says he decided the most realistic route for the 25-person company was “to pursue a path to wind down.” In November, he announced Attune — which has raised more than $14 million in funding — would shut down.

“You fight the good fight and do the best you can,” says Mr. Kessler, who last month rejoined 3Com Corp. as a senior executive.

Other start-ups are being pushed by their investors to sell themselves off, even at depressed prices. Jonathan MacQuitty, a venture capitalist at Abingworth Management Ltd. and a board member of Guava Technologies, says he recently encouraged the bioscience company to sell itself.

Demand for Guava’s products — instruments that do cell-based analysis — have tapered off as pharmaceutical and biotechnology companies reined in their spending, says Mr. MacQuitty.

So earlier this month, Guava agreed to sell itself to Millipore Corp. for $22.6 million; investors had put more than $50 million into the Hayward, Calif., company. The sale price was little more than Guava’s revenue, which totaled about $22 million in 2008.

“It wasn’t a particularly attractive price but at the same time, if Guava tried to persist, it would have taken a lot of time and money to wait out the current situation,” Mr. MacQuitty says.

Overall, 15 U.S. private companies backed by venture capital were sold in January for an average price of $5.7 million. That’s down sharply from the average price of $44.2 million that 26 venture-backed U.S. companies fetched in January 2008, according to research firm 451 Group.

For some companies, the shakeout is an opportunity. DemandTec Inc., a San Carlos, Calif., maker of online software for retailers, last month acquired Connect3 Systems Inc., a Cerritos, Calif., start-up that also makes software for retailers. DemandTec bought Connect3, which generated about $8 million in annual revenue and no profits, for $12 million.

Dan Fishback, DemandTec’s CEO, says his firm had long been interested in purchasing Connect3 but last year would have had to pay twice as much. Now “it’s a buyers market,” Mr. Fishback says.

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