The Arizona Republic
A year ago, ponytailed CEOs could get multimillion-dollar price tags and fat checks from venture capitalists eager to add an Internet company any Internet company to their portfolios.
Today the climate for investing in fast-growing companies is more conservative, morose (some say) or simply less greedy. There is a return to old-fashioned business concepts such as revenue and profitability. Money, rather than time, is once again a valuable commodity.
"You have to be playing the new B2B game no ifs, ands or buts," said Debra Guerin, chief executive officer of Silicon Valley-based International Venture Fund. Not long ago, B2B was the lingo for business-to-business commerce. Now thats changed. "Back 2 Basics is what makes a business work," Guerin said. "In the old days you looked for a sprint; now you look at running a marathon."
Venture capitalists now want to know: "Are these guys in it for the long haul?" said Madharah "M.R." Rangaswami of the Sand Hill Group, a consulting and investment firm in San Francisco.
Making investments will be very difficult for venture capitalists over the next 6 to 12 months, Guerin warned. Others agree: Despite recent influxes of money into funds, the managers are being more deliberate in their deals.
Several factors are influencing the capital crunch.
Money from pension funds and other institutions has gotten tougher to get.
Institutions that allocated 6 percent of their funds to venture financing during the dot-com mania have cut it back to 3 percent, Guerin said.
Meanwhile, funds that have raised huge sums based on their success of recent years face their own challenge, Rangaswami said: With valuations down, they will have to invest in more companies while trying to meet expectations for the same high returns.
And those companies that remain in the portfolios of some funds now need help, so many venture funds are focusing inward rather than hunting for new deals.
Guerin said she has heard reports from investors about funds that plan to walk away from half the companies in their portfolios to spend time and money getting a good return from the rest. Managers of the orphaned companies are being left on their own to raise money elsewhere, she said.
It also will take longer for the remaining portfolio companies to exit and cash out.
Venture capitalists agree that fewer companies will go public, and many more will be consolidated or merged into larger companies.
"Youre going to see hundreds of acquisitions because they cant go public," Rangaswami said.
Fewer new deals are being done, and the softer market means the valuations put on companies are much lower.
Venture capitalists are looking at so few business-to-consumer ideas, typically promoted by young entrepreneurs, that some say the new definition of B2C is "Back 2 College." Too many B2C companies had no way to make money and offered consumers no real value, Rangaswami said.
"A cheap price on a book or a CD is not going to give the customer a reason to come back," he said.
Venture capitalists agree that investors today are looking for clear paths to profitability, revenue growth and quality. Products must fill a need in a large and growing market. Business plans must detail how the company will make its money "the part we hope isnt new, different and innovative," Guerin said.
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