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Silicon Valley Braces for Belt-Tightening

At Airbnb’s board meeting two weeks ago, one topic took center stage: how to contain accelerating costs. It is a question that until relatively recently received scant attention inside Silicon Valley’s big-name startups. But a string of rejections by the public markets of some of the tech industry’s superstars has prompted companies once primarily concerned with rapid growth to take a closer look at their spending.

Airbnb racked up heavy losses in the first half of this year as it spent heavily on marketing and adding employees. While it recorded a big profit in the third quarter, three people familiar with the matter said, the rest of the year might not make up for the early performance. It isn’t clear whether Airbnb will make cuts, but investors have increasingly been scrutinizing the company’s high overhead expenses as it prepares to go public next year, two of the people said.

Other startups already have taken steps to tighten their belts. Opendoor, a home-buying service valued at $3.8 billion, dramatically slowed a planned expansion to new markets this year, and its CEO has talked publicly about trying to be more frugal. Mattress maker Casper, which is likely to go public next year, recently trimmed staff to conserve cash. The changes, described by people close to the companies, haven’t previously been reported.

Rich Boyle, a general partner at venture capital firm Canaan Partners, said startup boards that he sits on have had more discussions in recent months about how to prepare for tougher times, including whether to reduce staff, slow office expansion and invest in fewer new products or services. Those considerations represent a reality check for investors and entrepreneurs accustomed to the last decade of “everything is up and to the right, everything easy to raise,” he said.

The poor IPO performances of Uber and Lyft, and WeWork’s failed attempt to go public, demonstrated that public investors want to see clear pathways to profits. Another factor, he said, was a pullback by SoftBank, which had been plowing money into tech startups since it launched its enormous Vision Fund in 2017.

“There is a sentiment shift,” Boyle said. “We’re entering one of the phases where it’s not growth at all costs.”

Rock Band vs. Symphony

For some companies, the focus on costs could be opportunistic, a number of investors and entrepreneurs said. With both WeWork and Uber carrying out significant layoffs—2,400 so far in WeWork’s case, with more anticipated—it is a good time for companies to trim extra expenses, without appearing to be an outlier in the industry.

But for many private tech companies, especially those with valuations surpassing $1 billion, the moves are necessities as questions about whether they can turn a profit in the long term have intensified.

“I think DoorDash, Instacart, Uber, Lyft, to some extent Airbnb, they are all going through this. What is the type of band they are? Are they a rock band continuously growing at this stage? Or a symphony that’s elegantly run?” Opendoor CEO Eric Wu said last month at a conference for real estate tech executives and investors.

Opendoor itself took steps this year to try to stem its losses, including eliminating free lunches and relocating hundreds of jobs. The company also sharply rolled back a planned market expansion. Flush with hundreds of millions of dollars in venture capital, including from SoftBank, the company said late last year it wanted to grow its number of markets to 50 by the end of 2020. “We’re launching a market every three weeks,” Wu said at a conference last November.

Instead, Opendoor ended up pumping the brakes on its plans despite raising even more money. It likely will be operating in about 24 cities by year-end, people familiar with the matter said. Opendoor said in a statement that its revenue rose by 150% this year even as it slowed market expansion in favor of developing other services, including a new mortgage business.

Another firm debating whether to dial back growth is Sonder, a property management startup recently valued at $1 billion. The company, which leases apartments that it then rents to travelers, plans to start asking more landlords for rent reductions in case of an economic recession.

“If you don’t give us that [lease] clause, we’ll walk away and we won’t do the deal. With market conditions choppier, everything related to risk and cash burn, we’re increasing the bar and seeing how the market responds,” CEO Francis Davidson said. “This is being debated [among executives], real time.”

But the conversation is a delicate one for companies, who want to project confidence to employees, investors and competitors, as well as live up to a private valuation that often hinges on growth potential. Davidson said he still thinks the fourth quarter will be Sonder’s biggest in terms of number of units signed.

“Don’t mistake my comments for a general pullback. The growth is still incredible,” he said of Sonder.

Even SoftBank CEO Masayoshi Son is trying to convey discipline to startups that he has previously encouraged to grow at nearly any cost. He told a gathering of chief financial officers of Vision Fund–backed companies that they should prioritize cash flow rather than user growth or revenue, according to news reports.

Eye on Rent

One sign of market retrenchment is the amount of San Francisco office space that tech firms are trying to shed. The city has the most office space available for sublease in more than a decade, according to research by Cushman & Wakefield.

Some firms’ real estate footprint exceeded their needs as they reduced staff or grew more slowly than expected. Uber is trying to find firms to sublease more than 700,000 square feet of space in downtown San Francisco before it moves to a newly built office. The company had said a few years ago it planned to keep all its office space, despite building a new headquarters.

Other San Francisco companies trying to find takers for some of their offices include Pinterest, Cruise and Dropbox, which recently signed leases for bigger spaces, and Instacart and eBay, which are downsizing, according to Cushman & Wakefield.

Whether those office spaces are quickly gobbled up “will be key to how the market behaves for the next year or two,” said Robert Sammons, senior director of research at Cushman & Wakefield.

Even seemingly profitable companies are taking a second look at their real estate costs. Stripe, a financial services startup, said this fall it would move its headquarters from San Francisco to a less expensive suburb south of the city. The company, which opposed a recently approved city tax increase on financial services firms, cited a lack of space in San Francisco.

Airbnb is in a better position than most venture-backed tech companies when it comes to demonstrating high profit potential. Last year, it had a profit of about $18 million, excluding taxes and interest. But the company has had more debates recently on where to cut spending as losses swelled in the first half of this year.

Two long-serving Airbnb executives, COO Belinda Johnson and Vice President of Experiences Joe Zadeh, recently announced they would soon leave their roles but remain at the company in different capacities. They both oversaw divisions that partly contributed to the company’s losses. Johnson said she is leaving to spend more time with her children, and would remain COO until March 1. “I have told Belinda that she can return to Airbnb as an executive if she ever wishes to do so,” CEO Brian Chesky said in a statement last month.

Chesky described new pressure across the industry to show profits as a reality check after a long period where very capital-intensive businesses were lumped together with companies that were much easier to grow. “In this world where software is eating the world, we can’t treat all tech companies the same,” he said at a conference last month, adding that his own company was “mostly capital-light.”

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