Just plain uppity - Startups used to be on the short end when it came to
raising money. These days, some are holding all the cards.
By Luisa Kroll
Forbes, 20th September issue
© Copyright 1999 Forbes.com
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LONG AT THE MERCY of venture capitalists, entrepreneurs are starting to get
even.
EXHIBIT 1: Sabeer Bhatia was turned down by 20 venture capitalists before
finding one to back Hotmail, which provides free e-mail. But that was way
back in 1995. Not long ago a VC offered to close a round of funding for
Bhatia's latest startup--Arzoo.com, which mysteriously promises to
revolutionize buying and selling over the Web--during a round of golf at
Pebble Beach. And that was with only the foggiest idea of what Arzoo was up
to and before Bhatia was even looking for money.
Exhibit 2: Ted R. Dintersmith, a principal at Charles River Ventures in
Waltham, Mass., recently met with a group of entrepreneurs. When he asked
for references in a follow-up call, they were shocked, maybe even insulted.
The next day they called him to say they'd gotten funding from two other
firms.
Exhibit 3: Wooed by a half-dozen VCs, David Secunda, chief executive of an
adventure-gear e-commerce site, picked CMGI's AtVentures in Menlo Park,
Calif. The first time they visited him, he handed them a term sheet--once
the sole prerogative of VCs--that tried to preempt a host of terms that were
favorable to investors. He won on most, and PlanetOutdoors.com eventually
raised $10.5 million, four times what it had sought.
Exhibit 4: After Donna Dubinsky, a cofounder of Palm Computing, left 3Com
last summer, she found a check for $1 million in her mailbox--from a venture
capitalist who wanted to back her, no matter what her next enterprise.
It used to be that VCs held all the cards. Not anymore--at least when it
comes to the most promising startups. "We've seen the balance of power shift
from the financing sources to the entrepreneur," says Wendy Phillips, a
venture capitalist at the Menlo Park office of Advent International. It's
simple supply and demand. There is more money than ever chasing a finite
number of good deals. In the second quarter of this year VCs poured $7.6
billion into companies. Entrepreneurs can be picky, since there are plenty
of sources of capital out there. Angels, corporate investors, even your
lawyer may want to hand you money. Kris Hagerman went through hell raising
money for his first business, an on-line yellow pages. His second startup,
Affinia, provides customized shopping portals for small Web sites. This time
he knows how to throw his weight around. After getting a $3 million seed
round from Sequoia Capital, Hagerman decided he needed more money but talked
Sequoia out of taking the whole round. To three other investors he delivered
an audacious ultimatum: To play, you'll have to close the deal within three
weeks--and take stakes valuing the company at five times the first round. No
one blinked; they even doubled his offer. "I'd never before been the
governor of valuation," says Hagerman, who raised $12 million. "I'm pretty
sure the investors would have gone higher." Says Charles River's
Dintersmith: "We used to be buyers. Now we have to be salesmen. We have to
show we can add value." Sabeer Bhatia reports that one VC asked him to call
an entrepreneur on his behalf and say what a good investor the VC firm was.
Venture capitalists aren't going to chase every deal that comes their way,
though. There is such a thing as stepping over the line. When a partner at
Sequoia called an Internet music startup to say he was interested, the
entrepreneur told him he'd get back to him in a few days. By the time he
did, Sequoia had backed rival MP3.com, which went public six months later.