WHY YOU CAN'T GET FUNDED
By Lawrence Aragon [email protected]
November 3, 1999, Redherring.com
Copyright © Red Herring Communications
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You're not going crazy. If you've been feeling like there's a conspiracy to
prevent you from raising venture funding, you're not that far off the mark.
Even though VC firms are raising the greatest sums of money in the history
of the business, gaining access to that capital is as difficult as it has
always been -- maybe more so. That was a key take-away in a panel discussion
of some of the nation's most respected venture capitalists at Red Herring
Communications' NDA '99 conference on Monday. It seems to me that the only
folks getting funded are serial entrepreneurs or executives from successful
public or private companies. So even though there is more money to go
around, the "haves" get more and the "have-nots" continue to bang their
heads against the wall. Why, I asked the NDA panel, am I getting so many
emails from
frustrated entrepreneurs who can't get funded, when VCs raised $7.7 billion
in the third quarter alone? The answers I received won't sit well with most
readers, but it's
important to know where VCs are coming from.
OVERWHELMED
Panelist Bill Reichert, president of Garage.com, a Web-based service that
helps entrepreneurs raise seed capital, claims one of the reasons
entrepreneurs aren't getting funded is that there are just too many of them.
"The problem is that now everybody is an entrepreneur, and everybody coming
out of business school has a dot-com business plan," he told the packed
auditorium.
Talk about a red herring. While it's true that there are more business plans
landing on VCs' desks, most of those investors will toss aside a plan from a
life sciences or
hardware startup but throw tens of millions of dollars at me-too dot-coms.
The rationale seems to be that it's easier to put money into something that
institutional investors understand and won't question than to put it into a
company that's going to take a lot more time and effort to turn into a
winner. If a VC firm writes checks for ten dot-coms, all it has to do is hit
it big with one to increase its internal rate of return (IRR) tenfold.
That's called spending, not investing.
To his credit, Mr. Reichert acknowledged that "there's nothing more
maddening for an entrepreneur than to hear a bunch of venture capitalists on
a panel say, 'There is way more money than there are good ideas.' There are
probably 400 entrepreneurs out there that are about to rip our tongues out."
(Maybe he was picking up a bad vibe from the audience.). Also to Mr.
Reichert's credit, he was brutally honest about
the funding scene. "The chances of an entrepreneur getting into a name-brand
investor is comparable to getting struck by lightning while deep-sea
diving," he said.
FILLING THE GAP
That led into a self-promotion for Garage.com, angels, and boutique VCs,
which Mr. Reichert contends are filling the gap left by mainstream VCs that
have abandoned seed funding and early rounds to focus on larger, later
rounds. Panelist and venture capital grand dame Ann Winblad came to the
defense of longtime VC firms like her own, Hummer Winblad Venture Partners.
Hummer still funds early-stage companies, she says. The problem, as she sees
it, is that deal flow is greater than it has ever been, and the quality of
the deals landing on her desk is getting better and better, but VC resources
haven't kept up with the pace. Even though VC coffers are fit to burst, the
panel generally agreed that a shakeout is coming. And that's going to drive
many of the new sources -- angels and boutiques -- out of the business, says
Gary Rieschel, executive managing director of Softbank Venture Capital. If
the stock market takes a big hit, 700 out of 800 VCs will go out of
business, Mr. Rieschel predicted. His reasoning: the new, small firms are
funded by high-net-worth individuals, not institutional investors.
THERE'S HOPE
Before you slit your wrists, take heart in the story of Arthur Do. After the
doom and gloom of the NDA panel, I met Mr. Do at a cocktail reception. He's
the cofounder and chief technology officer of Shiftkey, a San Francisco
startup focused on content delivery. After he and his partner, Adam Souzis,
had one too many doors slammed in their face, they started Shiftkey
themselves with $10,000 apiece. Mr. Do, who is married with a child, took a
second mortgage on his home and some after-hours consulting work to stay
afloat, while Mr. Souzis maxed out his credit cards. After all their sweat,
they landed top-tier customers like Reuters (Nasdaq: RTRSY), Thestreet.com
(Nasdaq: TSCM), and IBM (NYSE: IBM). That led to an $875,000 round from
"venture catalyst" Interactive Minds, which has backed hotshots like
Goto.com. With the customers and investment, Shiftkey is building momentum.
It's now finding "serious" interest from four VCs, a group of angels, and
Reuters for a series B round of $8 million to $10 million, says the
startup's CEO, David Mathison.
The Cinderella story isn't quite complete, but the tale of Mr. Do and Mr.
Souzis suggests that entrepreneurial dreams can come true.
Don't let a "no" from a VC kill your dream.
P.S. I've received some great suggestions for the VC to
field your questions in the second installment of The Smart
VC. But I could still use more. Send 'em in. ... As always,
don't hesitate to contribute your feedback as well as
suggestions for future columns.
Lawrence Aragon [email protected]