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Silicon Valley start-ups rein in spending and prepare for layoffs

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Techies react to the turmoil in Silicon Valley
Techies react to the turmoil in Silicon Valley

Silicon Valley is bracing for layoffs at some of its biggest venture-backed companies, according to recruiters and tech insiders.

"People are obviously very unsettled these days with the news," said Greenhouse CEO Daniel Chait, whose company provides recruiting software. "I had a call with a handful of CEOs on another topic, but it quickly turned to the state of the markets."

Recent turmoil in tech stocks, including LinkedIn and Tableau, is reverberating around the Valley.

"It trickles down to the venture capital community, then to the start-up world," said Chait. "Everybody is talking about how their companies are reacting, what's going on in boardrooms and how people are planning."

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In the past week, electronic health records start-up Practice Fusion — targeting an IPO next year — laid off 25 percent of its staff, and troubled human resources start-up Zenefits announced it has installed veteran tech exec David Sacks to right the ship.

Zenefits' valuation had tumbled over the past year, along with employee sentiment. Just 52 percent of its employees believe the future of the business is bright, according to review site Glassdoor.

"No one wants to say anything, but you hear it from investors and from other founders," said Vlad Rikher, CEO and co-founder of Zenput, an app for enterprises to collect and aggregate product data. "Toward the middle end of this year, there will be a cleaning out of employees at some of the bigger start-ups."

The bad news goes beyond start-ups. Yahoo on Wednesday began cutting up to 15 percent of its workforce, Re/code reported, citing sources.

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Volatility in the job market for tech workers is one of many signals of a cooling in the funding environment for venture capital backed start-ups. Management teams are meeting behind closed doors with investors to try to figure out how best to protect companies forced to focus on creating sustainable businesses, rather than growth alone.

"Any time one sees a seismic shift, as we are seeing in the market, it affects hiring," said Kleiner Perkins Caufield & Byers partner Juliet de Baubigny. "I really like markets like this, as painful as they are, because it allows for really good hygiene and discipline."

Between December 2014 and December 2015, 15 percent of Internet professionals switched jobs, more than double the U.S. average of 7 percent, according to LinkedIn Talent Solutions. For the most part, those people stayed within the industry, though there was some migration to financial services.

"Uncertainty in the tech industry is really pushing people back towards more certainty — working at a mutual fund, a bank, a hedge fund," said Vivienne Ming, executive chair of edtech start-up Socos and a visiting scholar at the University of California, Berkeley. Ming studied job volatility prior to the dotcom market crash of 2000.

"As things tighten up you are going to see people jumping around a lot and then even the opportunity to jump around is going to dry up if the funding doesn't stabilize," she said.

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Any time one sees a seismic shift, as we are seeing in the market, it affects hiring.
KPCB partner Juliet de Baubigny

Margaret Quigley, 27, a techie with some coding experience, is on the hunt for a job in San Francisco.

"I don't really see the value in a lot of start-ups. I am on AngelList and there is literally Airbnb — for cats!" she said. "When I apply for jobs, I am actually thinking, 'Do I see value in the platform?'"

Quigley, who previously worked at a popular consumer start-up, has been job hunting for five months. She recently rejected one start-up's offer, a one- to two-month tryout — without pay. Quigley said she has also rejected multiple sales job offers and an offer that was in the right field but came in too low.

At this point, setting up her own consulting business or moving to New York — where her resume is attracting more attention — may be her best options.

"I think the tech industry there is a little more palatable," she said.

Thomas Barwick | Stone | Getty Images

It's a tough time to be job hunting in Silicon Valley, and things are about to get a lot harder for individuals with certain skills.

"If you're an engineer you probably have no problem," said Rikher. "If you're an entry level marketer, it might be starting to get a bit tougher."

Tech workers considered nonessential at struggling start-ups are the first to be shown the door as CEOs seek to rein in spending and stretch investor dollars. In doing so, they buy time to recalibrate the business or pivot to a new product, often requiring a different blend of employees.

This was the case for two San Francisco-based tech workers who each held marketing positions at struggling start-ups. Neither felt comfortable sharing their name or the name of the companies where they had worked because the details have not been made public.

One of the workers, who was laid off in September along with all but the core engineering team, has already found another job, and believes she is better off. The start-up is simply going through the motions until the money runs dry, or executives find a product customers will pay for. "They are basically a Zombie company right now," she said.

Toward the middle end of this year there will be a cleaning out of employees at some of the bigger start-ups.
Vlad Rikher
Zenput CEO and co-founder

Recruiters and jobs experts echoed that sentiment, saying that Silicon Valley is poised for a realignment, barring a shift in the public markets re-opening the IPO window or bullish moves from blue chip venture capitalists to alleviate fear.

"It's not just the tech companies, it's ... big law firms," said Ming. "They sit on top of the money that comes out of these start-ups and the funding events, and if its not healthy, you'll see them pulling back also."

Don't expect layoffs at the hottest handful of unicorns or well-funded start-ups with strong business models though.

"There's a little bit of a dichotomy," said Carolyn Betts Fleming, founder and CEO of Betts Recruiting. "Some companies have been doing layoffs and taking a step back to focus on their product and others are actually being more aggressive."

"We have seen a lot of pressure from some sales leaders and CEOs to make hires as quickly as possible in Q1," she said.

Many VCs see the current market as an opportunity. Kleiner Perkins has placed four C-level executives at its portfolio companies since January.

"It allows you to take a step back and think about who you add and how you add and not rush, and have this frenzied hiring environment that we have had for the last few years," said de Baubigny. "We didn't lose a single candidate."

"The quality engineers and execs will flock to the quality start-ups, and it's going to take a lot of heat out of the market," she said.

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A hiring manager at a well-funded enterprise software as a service start-up recently retracted a job offer when the prospective employee started making too many demands. The candidate wanted more money, the opportunity to work from home three days a week and to set the hours. Six months ago the company scrapped free in-office yoga and massages.

For start-ups hoping to lure employees with Google-style perks, it is time to re-examine spending, said insiders. Many noted that quality employees are attracted to a companies mission and culture, not free lunchtime wood-working classes.

"People who had been hiring based on perks, fun times and careless hypergrowth I think are feeling really panicked," said Greenhouse's Chait. "You see lots of companies who — when the business depended on endless venture capital to fill the kitchen with free Kind bars and get everyone in on this promise of endless growth — those folks are the first to overreact the other way."

"Everyone wants to be Google, and the idea of having perks is really highly treasured in the Valley, so you might actually see companies going out of business before they will give up their perks," said Jon Bischke, CEO of recruiting software platform Entelo.

On the other hand, said Bischke, "you might actually see an increase in the number of really scrappy start-ups doing something genuinely different just because there is no one paying them just to be another Uber for teddy bears."

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Lucy von Held | Blend Images | Getty Images

So far, there has not been a mass exodus from start-ups to big public tech companies but that could change, experts said.

"We might start seeing ... more tempered conservatism come into the decision making about whether to join a start-up or not, but we haven't really seen that yet," said de Baubigny.

"Anyone who was in it just for the money — those are the people that are going be running for the larger organizations," said Betts Fleming.

Certainly, joining public companies may start to look a lot more attractive to top talent as unicorn start-up equity becomes less liquid.

You might actually see companies going out of business before they will give up their perks.
Jon Bischke
Enteo CEO

For the tech giants, skittishness about start-ups opens up an opportunity to snag top talent at lower prices.

LinkedIn CFO Steve Sordello highlighted the battle for top talent at the Goldman Sachs Technology and Internet Conference in San Francisco on Tuesday. "We are competing in an environment where talent is expensive," he said. "We have a lot of private companies throwing equity at talent."

"Over time stock-based compensation will scale down," he told analysts and investors.

"The winners in the near term are going to be places like Google, Apple and Facebook that have big balance sheets," said Ming. "Their hiring strategy focuses around just sucking up extra talent and keeping it off the market so they kind of like this, because they need to spend a little less money just to keep people out of other tech competitors."

In addition, they can buy risky start-ups at fire-sale prices to get new features into their product lines and acquire talent, said Ming. "There's still going to be major entrepreneurship going. Google itself was counter to the trend of the original dotcom bust."

Disclosure: CNBC parent NBCUniversal is an investor in Re/code's parent Vox Media. Re/code and NBC have a content-sharing arrangement. CNBC also has a content-sharing partnership with Yahoo's finance site.

CORRECTION: An earlier version misspelled David Sacks' last name.