There’s no questions venture money is tighter in the valley. And that means more startups are struggling to cut costs are or are running out of money and failing outright.
Startups valued by their investors at over a billion are called unicorns, because they were once thought to be so rare. In 2014 and 2015, money flowed so freely, unicorns became more like cockroaches.
In 2016, a few richly-valued startups have hit rough patches.
While all of this sounds like a bad thing for the startup world, it turns out, many startup CEOs are happy and relieved about the changing environment.
That’s because cash-rich startups can no longer poach their engineers by offering to double or triple their salaries and piling on bonuses and stock options.
One CEO told us he had hired some engineers away from Google only to lose them to a cash-rich unicorn who offered them a $1 million compensation package.
Engineers getting CEO-like salaries
At the Rutberg Future Mobile Summit, taking place in the Bay Area this week, a panel of other CEOs told similar tales.
One of them was Mohit Lad, the CEO of ThousandEyes, which offers a service that helps troubleshoot network problems for companies using cloud computing services.
“I feel good about a correction where companies can’t just raise crazy money and throw crazy salaries at our employees,” Lad said during a panel discussion at the show.
Lad, has raised about $60 million for ThousandEyes so far, including a round that closed in February, after the money started to get tight.
He said that employees have gotten duped by the situation too. Three of his employees got poached by a newly funded, cash-rich startup and wound up unemployed months later, when the startup couldn’t sustain itself and coudn’t raise more money in this environment.
Lad had to change hiring tactics during the boom.
“We never want to be the highest-paid offer that comes in. We want to be second best. I don’t want them to come to the company because we’re paying the most. I want them to come because it’s a mission they believe in, and once here, we take care of employees so they are always happy.”
The strategy has worked. One of his engineers was offered double his salary by a startup some months ago but turned it down. “He stayed and is doing well,” Lad said.
BlueJeans Network CEO Krish Ramakrishnan, also on the panel, agreed. “For companies with strong fundamentals, this is the best thing we could ask for. Employees aren’t moving to unicorns offering things like free massages.”
He said that some engineers were being offered “CEO like” salaries to join startups.
BlueJeans offers a cloud videoconferencing service and has raised its fair share of money about $175 million, including a $76 million round last fall, right as things started to get tight.
Ramakrishnan says that normal engineering salaries aren’t coming down. The big, established companies like Google and Facebook are still paying top dollar and keeping competition high.
But the crazy double or triple salary poaching offers have abated, he said.
Meanwhile, Dan Teran, CEO of Managed by Q, says that for startups that have good revenue growth and cash-flow, investment is still available.
It just takes more convincing to get VCs to bite. Managed by Q is a two-year old startup for office management services in New York like janitorial services, catering, snack stocking, and office supplies.
Teran has raised over $42 million so, including a $25 million series B round that closed in April. One of its investors is Google Ventures who had backed a company called HomeJoy, a similar marketplace for hiring cleaning and maintenance people. HomeJoy closed its doors last fall.
“Google Venture had just had HomeJoy eat the dust. It had raised a ton of money and really crashed and burned. The partners in the room grilled me,” Teran recalls. “But we had strong fundamentals.”
Since Managed by Q has become a buzzy startup in New York he says he’s seen a handful of “copycat” competitors launch and struggle to raise money. And that’s another reason “a tight market works to our advantage,” he says.