Shaking The Money Tree 4, Q2/2000:
With A “B,” Bubba
Money In The Game, But Investors Play Cards Closer To The Vest
Burke Looks Tough
doing more thorough due diligence these days because the
investments are bigger, the schedules are longer and the risks
are greater. Yet,
the risk in choosing the wrong partner is far greater for the
entrepreneur than the investor, so do your due diligence at
least as thoroughly as they do. John Burke of ABS
Look at the deals they’ve done.
Are they similar in stage, size, industry?
Talk to the companies in which they’ve made
investments, and not just to the rosy ones.
Talk to the investments that did not work out and see
how the investor reacted.
Look at the partners.
What kind of backgrounds do they have?
Have they been VCs their whole lives?
Have they ever actually a created a product or built a
Look at the portfolio.
Are there synergies?
Can they make helpful introductions?
Can you kiretsu?
Look at the level of involvement you want.
Do you want them to sit on your board, or do you
just want their money. Maybe
it’s their Rolodex you want.
Some investors are more active than others, so make
sure your philosophies match.
5. Look for the next
are tiers within the industry.
Where can this investor help you go once you’ve
graduated from the early stages?
VA -- August 31, 2000)
Despite recent stock marketfluctuations that have left almost everyone
dizzy, venture capital investments in Washington, DC area companies
hit a major milestone in Q2/2000, surpassing $1 billion dollars in a
single quarter for the first time, according to the latest results
(PwC) latest MoneyTree™ survey.
“It's expected that
venture capital investment is going to remain strong,” said PwC’s
Kevin Thompson, discussing the numbers at “Shaking The MoneyTree,”
a quarterly event hosted by PwC and the Morino Institute’s
Netpreneur.org, “There is plenty of money in the venture capital
That’s the good news,
but it doesn’t mean that entrepreneurs can expect to sit back and be
wooed any longer. There
may be more money available for the right deals, but the Internet gold
rush is largely over and netpreneurs will have to work harder to get
it. What’s more, many
questions remain, according to Thompson, such as, “What will happen
if the public markets remain difficult?
What's going to happen to valuations?
What's going to happen to very early stage deals?”
A panel of venture experts at this morning’s
event offered answers to these and similar questions, examined the
implications of VC activity for Greater Washington’s Internet
entrepreneurs and offered practical advice for netpreneurs seeking
money amid the mixed signals. PwC
provided the data from it’s most recent MoneyTree survey, and the
insights were provided by John Burke of ABS
Ventures, John May of New
Vantage Partners and John Muleta of PSINet
venture-backed investments in Greater Washington companies hit a
record $1.147 billion, exceeding the previous record of $853.3 million
set last quarter and more than triple the $329.7 million recorded in
Q2/99. Of the money
collected by regional firms, $785 million or 68% went to
Internet-related companies, and the breakdowns by sector show how
assessing what’s “hot” is still a moving target.
Access & Infrastructure, Tools & Applications and
Services remained the region’s strengths, garnering the most Q2
money. Both B2B and B2C
eCommerce, at one time each the darling of investors, still saw a
large percentage growth in the region, but those numbers might be
slightly misleading for several reasons: they reflect deals already in
the pipeline during Q1; regional investments in those sectors were
comparatively low during the previous quarter, leaving plenty of room
for growth; and the size of rounds in those sectors tends to be much
smaller than the mega-deals seen in the other spaces.
eCommerce deals were down from Q1, but netpreneurs in the
commerce and content sectors can take heart from Muleta’s
observation that if a lot of money is going to telecoms and Internet
infrastructure companies, “That tells me it is a matter of time
before the B2B's and B2C's come back. It's all cyclical. You
have to have a business plan or an idea that can last until the next
wave comes in, but what do you think they are going to do with all
Comparing Internet Sector Deals (in $
One trend that accounts for some of the growth in
both national and regional venture numbers is that more companies are
going for more and larger later rounds as an alternative to IPOs in
today’s tricky markets. “We
expect to see that trend continue,” said Thompson, “because you
get almost as much money right now through a large private round as
you could in an IPO.”
The private markets have changed in response to
public market conditions, leading Thompson to ask whether the search
for venture money has become a buyer’s rather than a seller’s
market. Yes, to a large degree, agreed the panel, noting that VCs
have become more selective and valuations have continued to go down.
Being in today’s hot sector and a having a proven management
team may produce exceptions to the trend, but, as a general rule,
Muleta observed, “It's a tough market, so you have to be well
funded. Money is going to
be difficult to come by, so show a plan for 18-24 months.
The VCs also have to support other companies they have already
put money into, so there is more claim on dollars from the hot times.
Investors have to support companies for three or four more
rounds than they originally thought, because they thought they were
going to take them public a lot faster.”
Burke added, “One reason why deal size and
round size have gone up, but the valuations have not gone up
measurably, is probably because most groups are now funding for 18
months of cash. If you’re business model is predicated upon free, easy
access to money, you're going to have a hard time.
People are raising more money to put away to weather the
And while some sectors may be hotter and more
competitive than others, don’t think that a little cutting and
pasting in the business plan can help you jump from one to another.
Entrepreneurs have tried, but, according to Burke, “It’s so
weak when somebody comes in with a B2C model and three months later
they’re back and now it’s B2B2C and they’re saying ‘It's
changed! It's better!’
No, it's very weak and it’s transparent.
The deeper issue is that if you have to change the model to get
money, you have a real problem. You're
not passionate about what you're doing; it's not really what you love;
you're just chasing the dollar. It's
just financial engineering, and it's clear to the investors.”
In the end, interest may flutter between sectors
and public markets may fluctuate between highs and lows, but the fact
remains that there is more money available and being invested than
ever before, and a lot of it is making its way to this region.
“The world is awash with money,” observed May, “so it's
judgment and time that we're really dealing with.”
A good bit of that money is coming from a new
group of increasingly active players, corporate venture funds like
Muleta’s PSINet Ventures. According
to May. “One of best
things going on in our region is the proliferation of funding sources
that are non traditional¾sources
outside the region, corporate sources, angels, accelerators, you name
it. You don't have to
just think ‘either/or.’ Almost
all the groups syndicate, almost all are getting to know each other
and figure out who the quality players are.
One of the things to learn about is the new lay of the land of
multiple funding source and how to use them.”
Working with a strategic corporate investor can
have advantages and disadvantages.
On the upside . . . well . . . it’s money, first of all. Corporate investors also can bring technological and
marketing partnerships sometimes, and many such funds, like PSINet
Ventures, offer services including hosting or Internet access in
return for equity instead of cash.
This can help stretch your dollars in a time when high cash
burn rates are no longer attractive.
On the downside, remember that big corporations rarely move as
quickly as startups, so be sure that those proposed technology and
other partnerships will be more real than imagined, and remember that
these corporations will very often have strategic goals different from
your own. Money always
comes with strings attached.
If the good news is that there’s more money
available from more sources, the challenge is that you’ll have to
work harder to get it. Particularly,
it puts an even greater onus on entrepreneurs to become more diligent
in their due diligence when it comes to picking investors.
Muleta offers advice for sizing up corporate funds that applies
equally well to VCs, angels or any other source of funding: “Listen
to them first. Understand
their strategic initiatives. If
it's not a fit, walk.”
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