Nuclear winter for tech startups? Not if you’re open source

I can’t begin to guess how many PowerPoint slides I’ve seen in my life, but I’m sure it’s in the thousands. Most are either incredibly boring or annoyingly perky. But I’ve rarely, if ever, seen one that delivered bad news as bluntly as the one Sequoia Capital showed at an emergency meeting of its portfolio companies last month: a tombstone with the legend “R.I.P. Good Times.” (Kudos to Om Malik for ferreting this out.)

Equally blunt was the warning from Sequoia General Partner Mike Moritz: “We’re talking ‘survive.’ Get this point into your heads.” He told the startup execs that they need to discard the dot-com model of sacrificing cash to build market share. Young companies need to be cash-flow-positive, and if they are not, then they need to get there now, he said.

Reader alert: Keep reading, there’s some good news for open source developers coming in this post.

I hardly need to tell you that Moritz’s advice translates into a word that’s becoming all too familiar in Silicon Valley: layoffs. Indeed, within weeks of that meeting three Sequoia-backed startups cut staff: Meraki, Mahalo, and Imeem. Sadly, though, those cutbacks are a tiny drop in the overflowing bucket of layoffs in the world of high tech.

Web 2.0 startups are high on the layoffs list

Since August, TechCrunch has counted some 40,000 layoffs at 179 technology companies worldwide. The vast majority were at older companies like Dell and Yahoo, and the survey does not include the 24,000 jobs that will be lost as a result of the Hewlett-Packard/EDS merger.

However, I’ve been looking hard for layoffs at startups and have noticed something pretty interesting. Web 2.0 is taking a big hit, but I haven’t heard much about job losses in the open source world.

Here, for instance, is a list I compiled from various sources of recent layoffs: Dash Navigation, eMusic, Faves.com, Gizmos, Hi5, Incredimail, Jawbone, Jaxtr, Jive Software, Moli, Mywaves.com, Pandora, Revision3, Seismic, Spot Runner, Sugar Publishing, Tesla, Veoh, Yahoo, Zillow, and Zivity, plus the three Sequoia companies.

What do we notice? These young companies are largely engaged in selling Web 2.0 technologies to consumers. (Tesla, of course, is a maker of electric cars.) They certainly use open source technology (who doesn’t these days?), but as far as I can tell, they are not engaged in distributing open source applications or infrastructure.

One reason Web 2.0 companies and those focused on SaaS (software as a service) are taking hits is the sheer number of startups funded in the last few years. Analyst Trip Chowdhry of Global Equities says there were more than 900 such companies funded in the last few years. “There are more companies than customers,” he says.

While that’s something of a deliberate exaggeration, Chowdhry has a point. Too many venture capitalists followed the herd and threw money at companies whose business plans were ephemeral, to say the least. And with consumer spending off the cliff, glitzy Web 2.0 technologies that don’t offer real value are in serious trouble.

Why open source startups are in better shape

I asked Matt Asay, a vice president of Alfresco and a veteran open source exec, for his take: “On average, I don’t think many open source companies are affected by Sequoia’s counsel precisely because we didn’t overbuild in the first place. This doesn’t necessarily have anything to do with superior management at open source companies, but rather a built-in throttle that scales hiring to downloads and other indicators of incoming interest in one’s open source product. As such, we tend to hire more cautiously and only when the market has demonstrated that it can support those hires.”

Similarly, open source author and consultant Bernard Golden says that segments like virtualization, cloud computing, and open source have a critical advantage: “These are pain pills, not pep pills. Companies look to these technologies to save money.” Is he whistling past the graveyard? Maybe so, but Golden has put his money where his mouth is, recently founding HyperStratus, a company focused on those very technologies.

That’s not to say that all is well in open source. “In my conversations with open source companies — both those I advise and otherwise — no one is having a hugely enjoyable time in this market. But in nearly every case, management is reporting growth quarters. Painful, yes, but growth, all the same,” says Asay.

The economic climate is obviously terrible and corporate spending on IT is off, but open source is still seen as a way to cut costs, says Jay Lyman, an analyst with the 451 Group. On the other hand, Lyman notes that there is more pressure to give customers a sweet deal on maintenance contracts, which means that some of the big wins announced by open source companies are not nearly as lucrative as you might think.

And companies that think the now-trendy open source label is a guarantee of success regardless of potential ROI and differentiation from the pack are in for a hard lesson, says Global Equities’ Chowdry.

“Almost every Silicon Valley company may reduce its workforce by at least 2 to 3 percent before the end of the year. Some companies are expected to reduce their workforce by as much as 10 percent before the end of the year,” Chowdry wrote in a depressingly downbeat note to clients. “Campus recruiting has been scaled back, raises have been frozen. Hiring freeze, training freeze, travel freeze, Friday beer-bash freeze, free-laundry freeze, and end to discounts on laptops are now in full effect,” he added.

Yes, things are bad. There’s no doubt about it. But for now, at least, open source companies that have already been funded and are beginning to generate cash, are something of a shelter from the storm sweeping Silicon Valley.