Troubled startups prepare for soft landings

March 16, 2009 7:14:14 PM PDT
Like most businesses, these are tough times for Silicon Valley startups. Rescue teams are moving in to help, but in some cases, they're shutting down.

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The San Francisco-based music Web site Fuzz.com was a startup two years ago. It gave bands and their fans a place to connect. Now it has shut down -- and it's not alone.

"The word has gone out to an awful lot of companies from their venture-backed investors not to expect any more funding, and try to find the best soft landing that you can," said business reorganization attorney John Murray.

By soft landing, Murray means a sale, a merger, or a shutdown. His law firm specializes in counseling troubled startups.

Fuzz.com decided to shut down, and that means eight people lost their jobs.

"This is the soul-searching element, which is really tough," said Jeff Yasuda, founder and CEO of Fuzz.com. "We obviously love all the folks that had worked with us, and we had to make some pretty tough decisions."

When backers can't -- or won't -- provide additional capital, people like Martin Pichinson are hired to intervene. Pichinson is a wind-down specialist at the Sherwood Group in Mountain View. He walked us through the warehouse where records are stored of startup shutdowns. Thirty companies have been added to his to-do list in the past two months.

He says investors do their best to nurture the young ventures like children.

"You want your son or daughter to go, be married, be happy, have a good life, and enjoy their future," said Pichinson. "Well, if it doesn't happen, this is where they end up."

Fuzz.com shut down, but four of its 12 employees moved on to another venture, Blip.fm. It's a site where people can create their own music station.

"Keep in mind, just because the economy goes south, innovation doesn't disappear," said Yasuda.

Startups hope to be the next Google. However, it takes over eight years -- twice as long as before -- for a startup to "exit." Exit is the term for the process of going public and repaying its private investors.

"The downturn is certainly hurting. This is getting everyone nervous, and it's reducing the ability for the exit," said Pichinson.

Troubled startups have something in common with much bigger firms.

"I think in today's business environment, a reorganization is just part of the landscape," said Murray.

No one is saying this is a second dot-com bust, at least not like the one in 2000 and 2001. However, the lessons learned then, along with tighter money today, give startups less time to prove themselves.

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