The motto for Silicon Valley startups was often “Move fast and break things.” Now it’s “Cut fast and cut deep.”
Francis Davidson’s biggest challenge last year at his short-term apartment-rental website, Sonder Inc., was fending off a dozen new rivals fueled by a flood of investor capital. It wasn’t the worst problem a 27-year-old could have, as he ran a startup valued at $1 billion.
Last year, investors poured $136 billion into U.S. startups, according to PitchBook, just short of 2018’s record $141 billion.
With the hammering from Covid-19, including stay-at-home orders in many states, some founders find sales haven’t just plummeted, they’ve stopped. Investors have pulled back offers or changed the terms. Those still willing to finance startups have gained significant negotiating leverage overnight. Airbnb has borrowed $2 billion in recent weeks at a blended interest rate of close to 10%. Some of those lenders have the right to buy equity at a 40% discount to its valuation three years ago.
When Andrew Kitchell set out in late 2018 to raise capital for Lyric Hospitality Inc., a Sonder rival in short-term apartment rentals, he was looking for $30 million. Lyric and competing startups followed a strategy similar to WeWork’s — piling into long-term leases on properties to lock up space they could rent to customers. It was a quick way to grow.
Sonder’s Mr. Davidson faced the same hard choices, and quickly cut the trappings of Silicon Valley life. Gone were the free lunch for employees and the $10 per diem if they wanted to eat elsewhere. Out went the cereal and snacks and fresh fruit, and the $50 per employee per month budget for team-building activities. He said he has cut his own salary to $0.
On March 3, two weeks before virus containment shut swaths of the economy, Mr. Davidson huddled with Sonder executives who wanted to soften the company’s refund rules. The onetime consensus-builder vetoed his team. Sonder needed to conserve cash, and it would stick with its tough policy on cancellations. His call saved Sonder at least $8 million, he estimates.
“Our strategy is to make it through,” Mr. Davidson said. “I think I will be served well with paranoia.”
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