Dropbox cut a bunch of perks and told employees to save more as Silicon Valley startups brace for the cold
Culture of frugality
Dropbox has made other changes to its famously lavish employee perks lately, reflecting its more cutthroat attitude towards cash management.
In a company-wide email in March, Dropbox said it was cancelling its free shuttle in San Francisco and its gym washing service, while pushing back dinner time by an hour to 7PM and limiting the number of guests to five per month (previously it was unlimited, a big perk given its open bar Fridays).
Those changes will have a direct impact on Dropbox's profitability. The company wrote in the email that employee perks in total have been costing Dropbox at least $25,000 a year for each employee. Based on Dropbox's roughly 1,500 headcount, that would translate to about $38 million a year. At that scale, any kind of cost savings would help improve its bottom line. Dropbox declined to comment.
Dropbox isn't the only high-profile startup to unleash a company wide cost-cutting campaign lately. A number of unicorn startups, worth over $1 billion, including Evernote, Jawbone, and Tango, have all gone through some form of cost cuts, whether layoffs, office closures, or reduced employee perks.
In a more extreme case, Prosper, last valued at $1.9 billion, disclosed that its CEO would forego his entire annual salary this year, in addition to reducing its workforce.
Anaplan, a cloud software maker that raised over $230 million, replaced its CEO in part due to financial issues.
Even a smaller player like ToutApp, backed by Andreessen Horowitz, recently announced that it would not do any paid event sponsorships this year in an effort to embrace "operational ruthlessness" and get closer to profitability.
A lot of this has to do with the slowing venture funding environment in Silicon Valley. Investors have become much more conservative with their money lately, and are losing patience for startups that have failed to generate returns after years of free spending.
According to research firm CB Insights, "down rounds," in which companies raise at lower valuations than previous rounds, have outpaced the number of VC-backed unicorn startups since the last quarter of 2015. A survey by First Round Capital last year showed over 95% of the founders across all stages saying the funding environment would either remain the same or get harder in 2016.
In addition, a number of VC powerplayers, such as Benchmark Capital's Bill Gurley and Union Square Ventures' Fred Wilson, have become more vocal of an impending downturn lately, telling startups to get into "belt-tightening" mode soon.
"Because of the recent changes in the financing environment, I would guess that most startups are carefully re-thinking their spending and becoming more conservative with cash management," Matrix Partners' David Skok told Business Insider. "Over the long haul, that's likely to be a very good thing, and is when the great entrepreneurs will shine."
Big startups face the same problem
Employees at Kabam, the online gaming startup worth $1 billion, recently felt like there was a decrease in the number of office snack stands. Although the company denies it, some believe the snack stands are now placed more sporadically in order to reduce the employees' frequency of snack consumption by making it a little harder to get to them. That came alongside news of the startup cutting nearly 8% of its workforce to narrow its focus and cut additional costs.
Instead, Dropbox may want to show investors that its business is strong enough to IPO.
The public market has been brutal to tech companies in recent months, with only one tech company floating this year, an absurdly low rate for the industry. As more investors turn their focus to profitability, startups that burned through cash at a high rate are struggling to go public at their previously set private market valuation.
"The public market has shifted their mentality considerably around companies being cash flow break even," says Menlo Ventures' Matt Murphy. "When you get to a certain stage, you're optimizing for things that public markets care about, which is earnings per share and how quickly you'll get to cash flow positive."
The bigger problem for all startups, however, may be in retaining employees. As startups cut back on perks and delay their IPO, employees could grow frustrated and decide to join larger, more established companies that offer better benefits and stock liquidity. And if that starts to happen in droves, startups will have no one but themselves to blame.
"This is not just about Dropbox. It's a reflection of what's been going on in the Valley," one of our sources said. "We were overfunded, everyone was treating us like we're recession proof."