The
Tough Sell
As
the VC industry is increasingly apprehensive of new investments
and preoccupied with later-stage companies, startups will
have an increasingly difficult challenge in the road ahead
to prove there is a real market for their innovations beyond
the wonder of the technology itself.
"Early
stage companies have a tough go of it right now," says
John Morris, one of the co-founders of Tech
Coast Angels and a speaker at the upcoming Larta
University workshop, Attracting
Capital, (which addresses both private and federal
funding strategies). Investors are not only apprehensive,
Morris says, but are also largely distracted with trying
to sustain companies which they have already funded, and
are often focused on two issues--whether or not to continue
funding, or increase reserves to fund companies later. Either
way, investors are currently preoccupied with later-stage
businesses and technologies, whether because of past involvement
or attractive valuations.
"VC are now saying to themselves, 'Either I'm going
to invest in that later stage deal at a lower valuation,
or those customers that we thought we got last year are
now coming in this year and somebody else's problem is an
opportunity for me," says Morris. "Why invest
in a startup company when I've got five companies over here
that are at a better value--they've shaken some of the risk
out, and they've deployed a lot of money already. So the
VC will naturally want to get the same valuation with somebody
that's much further along."
Even
though this current prejudice against startups is well understood
in the industry, whether it will last is still debated.
"There's a reluctance right now to invest in early,
riskier technologies, but I think that's due to people licking
their wounds from the last few years. I don't think that
condition will persist," says Brad Jones of Redpoint
Ventures, one of the VCs who is interviewed in Larta's upcoming
study on venture investment in Southern California, the
Sand Dollar Report 2002. "We would love to invest
at the earliest stage--we can with good companies that have
good technologies. But I don't think the bulk of the VCs
out there will feel that way."
Despite
this possible shift in the general interest in the VC community,
the numbers from last year for early-stage investment are
quite sobering. According to the Sand Dollar Report,
early stage venture investments in Southern California
fell from 2000 to 2001 by 71% in number of investments and
by 60% in amount of dollars invested. Over the same period,
such investments in San Diego fell by 44% in number of investments
and by 19% in amount of dollars invested. The growth over
the entire recent economic cycle from 1995 to 2001, however,
gives rise to optimism. Southern California grew by 336%
in number of such investments and by 100% in amount of dollars.
During the same time period, San Diego grew by 40% in number
of such investments and by 216% in amount of dollars. The
reality that many startup companies have to face is that
if the window to generating revenues is uncertain, its chances
at attracting venture capital are slim.
Another
quick detour to turning off VC interest are technologists
that have become victims of their own creation. The investment
industry is bruised from a endless stream of utopian visions
of how swiftly customers would gravitate towards the latest
and greatest, and are now far more able to discern high
tech promise from high tech babble. No matter how innovative
a product may be, it doesn't in any way reflect either its
real potential for the marketplace, nor a technologist's
ability to run a company.
"You
know when I look at new companies, I see quite a few that
have a pretty interesting technology, but often they don't
have a team with the necessary experience to build a company
that you feel comfortable investing in," says Jones.
by
Wendy Hall
Larta Staff Writer
March
20&21: Larta University, Attracting Capital
This workshop covers all aspects and opportunities available
to companies interested in attracting capital. The class
will cover the various types of financing options and the
pros and cons of each of those, from government funding,
to loans, to all stages of VC financing, and how to decide
what type of capital a business is best suited for. This
session will also address how to pitch a company, and how
to negotiate business deals. The workshop is led by a panel
of investors, with practice pitch sessions performed.
more
information>
Coming
Soon from Larta:
The
Sand Dollar Report 2002: An Analysis of Venture Investing
in Southern California
(featuring Data from the MoneyTree (TM) survey)
sponsored
by 
Eight years after the initial Larta report on the venture
capital industry of Southern California (1994), the region
has undergone a considerable transformation, reflective
of the sea change in the regional economy itself. Southern
California is one of the most diverse economies in the country,
and, not surprisingly, has the most diverse venture capital
investments of any comparable region in the country. And
while venture investors in the region have been on a recent
roller coaster of rapid growth and even more rapid decline,
many of them remain optimistic, yet realistic, about the
opportunities ahead. This report on the venture capital
industry of Southern California features comprehensive new
information and data (including regions of San Diego and
Santa Barbara), with interviews from leading investors in
the region.
Interviewees
Include:
Brad
Jones, Founding Partner, Redpoint Ventures
Joel Balbien, Managing Member, Smart Technology Ventures
Ted Alexander, General Partner, Mission Ventures
Bridget Karlin, Senior Director, Redleaf Group
Sydney Edwards, Principal, TL Ventures
