Funding for startups

Bear Market Inspires Hibernation

As the telecom winter wears on, startups are wrestling with a central issue: Should they keeping attacking their market or lay low for a while?

Some startups, prodded by their venture capitalists, are drastically scaling back their activity and in some cases are going into a deep sleep known as "hibernation," in which as little money as possible is spent. Generally, hibernation refers to what happens when a startup significantly cuts its staff and suspends major marketing and sales activities.

Venture capitalists say hibernation is par for the course when the fixed costs of running a company need to be trimmed back.

"If you discover that [a startup] is not going to see revenues for another year, you have to ask whether you really want to spend twelve times the monthly burn rate," says Ravi Chiruvolu, a general partner at Charter Venture Capital. "Hibernation is a risky strategy, and it needs to be thought through carefully."

Each VC, of course, defines hibernation a bit differently. Few actually want to talk about it on the record. But in general, according to several startup and VC sources, a company in hibernation has some of the following characteristics:

  • It has cut its headcount by at least one fourth from its peak employment number -- probably significantly more. This includes companies that have furloughed staff until their market segment recovers. For systems companies, if they've cut back staff to fewer than 80 people, they're probably hibernating, says Doug Green, founder of The Bradam Group, a telecommunications consultancy.

  • It has suspended external marketing activities and reduced the size of its marketing staff by at least half since its peak. In many cases, the role of the VP of marketing is being filled by other executives or the CEO.

  • It spends only on product development and has curtailed all other activities.

  • Though its product is finished or nearly complete, it suspects it won't see any sales for revenue for at least 9 to 12 months.

Systems vendors usually incur the highest upfront costs to get their products to market, and they're the ones most likely to go into hibernation, VCs say. Technology areas prone to dormancy include long-haul DWDM equipment and components, as well as core switching and routing.

But how do you really know when a company is in hibernation? The criteria are subjective. There's no official press release. And, predictably, even companies that appear to be hibernating would rather eat hot gravel than admit that they're dormant.

In fact, Light Reading's search for a company in hibernation was a little bit like an investigation into the X-Files: Everybody would like you to believe you're a nut-case pursuing something that doesn't exist.

"Nobody wants to be identified as a company that's only being sustained for non-commercial reasons," says Marc Cohn, director of product marketing for Alidian Networks Inc.

Alidian, in fact, is one systems company that has had layoffs and now employs fewer than 60 people. A short time ago when it was changing offices, it lost communication with the outside world for several hours, causing some to speculate that it had taken a dirt nap (see Alidian Networks: Lost and Found!).

But is Alidian in hibernation? It doesn't think so.

"From our perspective, we're in better shape than most companies," says Cohn. "We have a maturing product that is in trials with carriers.

"I can't think of any systems company that hasn't cut back on staff," he adds. "It's not like Alidian has been wiped off the face of the earth."

Another company that's gone rather quiet is Tenor Networks Inc. Before May 20, the core MPLS switch maker hadn't put out a press release of any sort since October 15, 2001. The company's last announced funding round was in August 2000.

But is Tenor hibernating? It doesn't think so.

"Hibernation implies inactivity, and Tenor is certainly not inactive," says David Tolwinski, the firm's president and CEO. "Our focus continues to be on the dozen or so largest carriers in North America, and we are marketing directly to them."

Tolwinski adds that Tenor will be one of several vendors participating in a live MPLS demonstration at Supercomm 2002 next week. "If that is the definition of 'hibernation' then so be it. A more accurate metaphor would be sailing a tight ship through a difficult and stormy passage. It's not the time to fly the pretty flags yet."

AcceLight Networks Inc. has a similar story. It has been quiet for months and, though it announced "the world's first photonic service switch" about a year ago, it has not, as of yet, officially launched its product nor has it announced customers. The company also says it won't have a stand at Supercomm, a key place for vendors to be seen.

Is AcceLight hibernating? It doesn't think so.

Instead, it says its marketing department has remained the same size but adds it has been focused on marketing directly to a small base of carriers, rather than the world at large.

"We were never really that noisy to begin with," says Stacey Diffin-Lafleur, a marketing communications specialist for AcceLight. She adds that AcceLight opted not to exhibit at Supercomm so it could launch its product at NFOEC in September.

VCs say hibernating companies aren't calling it quits -- they're intent on surviving until the telecom market recovers. Of course, it doesn't help that both venture funding going into startups and investments going into venture funds are at record low levels (see VC Activity Continues to Crawl).

Most VCs are saying that the cutbacks have helped more than they've hurt. They say companies can still progress on the product development front without huge marketing and sales staffs. "We've seen incredible examples of companies that have substantially cut back but still manage to get a lot done," says Warren Packard, managing director at Draper Fisher Jurvetson.

But if its such a great idea, why wont the VCs talk about them? Even though the VCs claim it's a beneficial technique and that they came up with the idea, most of them won't admit that they have any companies hibernating in their portfolios.

In some cases, it may be the next best thing to shutting a company down. Perhaps the investors devised it as a way of procrastinating. At any rate, many experts think it's simply a bad idea.

"In most cases, going into hibernation is a bad idea and investors would be better off pulling out their money," says Bradam's Green.

"[Hibernation] is a good strategy if you're looking to cut your burn rate," says Kirk Walden, national director of venture capital research for PricewaterhouseCoopers."However, you're not really saving costs -- you're only deferring them."

So how does this mysterious process work? Usually it is driven by the investors or high-level board members who decide it's time to preserve capital.

When weighing whether it should hibernate, a company's board has to make sure it can sustain whatever technology lead it has, sources say. If the technology advantage is slim, the startup must decide either to shut down or to keep attacking its market until it runs completely out of cash. "It can be like running full speed into a brick wall," says Packard.

Once the decision has been made to hibernate, the startup's board must pick just the right time for the company to reemerge. Charter Venture's Chiruvolu says two things to watch are the public markets, which can help gauge the health of potential acquirers, and carrier capital spending.

But the bottom line is that even the hibernating startup will need to be woken up from its slumber -- and that will cost money. By the time the market has revived and it's time to wake the company up, some of the staff may have found other jobs, and the costs of reviving a company, especially a systems vendor, might be too great.

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com For more information on Supercomm 2002, please visit: Supercomm Special
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Lightmare 12/4/2012 | 10:19:13 PM
re: Bear Market Inspires Hibernation Gardner,

I agree 100% on the diversity subject. I never thought it was important but now I think it's important not just when it relates to the work environment, you can apply to anything in life and it usually makes things a whole lot better and more interesting.

But I need to just get over that NASCAR thing- believe me, I've tried to get into it but it's just not working for me.
gardner 12/4/2012 | 10:19:15 PM
re: Bear Market Inspires Hibernation
So then why is it that if you look at the members of many, if not all, telecom companies do we have requirements for people with engineering degree's and MBA's for the business folk?

And it has certainly served them well hasn't it? ;-) Obviously I'm not recommending ignorance. But by the same token I think failure to listen to ideas regardless of their source is as dangerous as hiring the unqualified. Most companies have a very diverse mixture of people working for them but they only listen to the ideas of the ones that have been pre-designated "the qualified sources".

Why not trot down to Walmart and hire people making $6.50 per hour to come up with the great ideas and implement them?
First of all you are enlarging upon what I said. Do you recall me saying that the implementers of an idea didn't have to be qualified? Second, I'm not recommending that only the unqualified be listened to. Your thesis is that good ideas can only come from those somehow defined as qualified. I said that good ideas can come from anywhere not that they have to come from the unqualified.

By the way, I happen to think you are right about hibernation. It probably will only prolong the agony. Just try not to be so dismissive of ideas from the "wrong sources". Ah shoot! Nascar is back on, gotta go. ;-)
mc_jaded 12/4/2012 | 10:19:16 PM
re: Bear Market Inspires Hibernation "...do you really think I would take Bob Bailey's advice after he made so many mistakes: Let's count: Extreme Packet, Abrizzio, SwitchOn, anyothers I forgot?"

From their 2001 10-K, Malleable was a bust, Datum had write downs against it. No announced writedowns on Toucan or AANetcom.
crapshooter 12/4/2012 | 10:19:29 PM
re: Bear Market Inspires Hibernation I'm going to have muyself frozen and tell them to thaw me out again when the sector recovers.


Don't be surprised if they never thaw you out.
Lightmare 12/4/2012 | 10:19:35 PM
re: Bear Market Inspires Hibernation Fantomas,

Another problem you'll run into is sorting through any advice you pick up here and making heads or tails of it.

What if 200 people respond giving advice of all sorts? Who is right and who is wrong? Some will respond to this post that there may not be right or wrong answers but you could end up more confused than before you started.

I'd like to see a poll:

In todays uncertain and challenging conditions, with no clear picture of what tomorrow will look like, who is best qualified to provide guidance to a CEO?

A. Management consultants
B. Investment Bankers
C. Analysts
D. Board Members
E. Fellow Executives from similar industry
F. Fellow Executives from different industry
G. VC's (yours or others)
H. Executive staff at existing company
I. Executive Recruiter
J. Your local Small Business Administration
K. Academic Professor
L. Spouse
M. Accountant
N. Attorney
O. Former Boss from years ago
P. Retired executive who was successful in 1999
Q. Your religious leader
R. Golf partner
S. A top 10 seller (book)
T. 12 ounce extra dry martini
U. You- Trust your gut and live with your decision
V. Other
fantomas 12/4/2012 | 10:19:36 PM
re: Bear Market Inspires Hibernation "You think someone like Dave Rickey or Bob Baily is going to respond to you to tell you how to run your chip company?"

Bob Bailey is likely unavailable to respond, as he is probably too busy perfecting his Everlast (of House of Pain fame) impersonation.

Where's your sense of humor, do you really think I would take Bob Bailey's advice after he made so many mistakes: Let's count: Extreme Packet, Abrizzio, SwitchOn, anyothers I forgot?
umustbejokin 12/4/2012 | 10:19:39 PM
re: Bear Market Inspires Hibernation fantomas;
As long as no one else even tried I may as well have a crack at it. If this doesn't work for your particular case maybe some of it does apply. It seems obvious to me that you have to keep the most talented and capable from all of the teams and let the other half go, stretch out your product cycle, and yes, even take on some of the marketing yourself. HTH.
Iipoed 12/4/2012 | 10:19:41 PM
re: Bear Market Inspires Hibernation lightmare, I got to agree with your post. Hybernation is not a way out. Even the established vendors are just trying to survive. Why waste what little financial and manpower resources that you have left.

At this point I would be on the phone 20 hours a day attempting to interest a vendor/manufacturer/whatever that your technology has great merit and would benefit them greatly. Of course you would be able to let your programs, hardware asics whatever go for pennies on the dollar. Split it with your remaining employees and let them get on with finding a job that can at least support their families for the near term.

The industry will return to greatness.
Lightmare 12/4/2012 | 10:19:41 PM
re: Bear Market Inspires Hibernation Gardner,

You say "Seriously, the quality of an idea does not necessarily depend on the pedigree of its originator. Sometimes the best ideas come from the least "qualified" sources."

So then why is it that if you look at the members of many, if not all, telecom companies do we have requirements for people with engineering degree's and MBA's for the business folk?

Why not trot down to Walmart and hire people making $6.50 per hour to come up with the great ideas and implement them?

I do not subscribe to the theory that because someone has a lofty title they are more qualified than someone else to come up with ideas or make decisions. But I do place a lot of weight on someone who has proven himself in real life situations. I'll stress the word "real" because I think many who were successful from 1996-2000 did not really prove anything other than the fact that they could ride the wave.

The next 18-30 months will be the most interesting times we have ever seen in the telecom sector.

And to our friendly CEO posting his message looking for advice: My friend, I doubt you are the only CEO looking for advice on how to make it through these tough times. I think many have tilted their head back and looked to the gods for answers. I singled you out because I think you are the first CEO I have seen post a message on LR message boards asking strangers for advice. I guess it's a sign of the times.

If you want advice from a naked fat guy who sits in his basement all day eating doritos then here you go:

Hibernation is a death sentence. You are on death row waiting to be executed.

Get the hell out and take some time off. When you return you will conclude that you missed absolutely nothing yet you'll be recharged and ready to go while your peers are white as a ghost and in a state of disbelief regarding their own situation.

You'll also find that when you return, many of your contacts, be it at the customer or vendor level, are no where to be found. Like some sort of X-Files movie. So once again, you'll have missed nothing.

mc_jaded 12/4/2012 | 10:19:44 PM
re: Bear Market Inspires Hibernation "You think someone like Dave Rickey or Bob Baily is going to respond to you to tell you how to run your chip company?"

Bob Bailey is likely unavailable to respond, as he is probably too busy perfecting his Everlast (of House of Pain fame) impersonation.
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