Riding out the storm
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by David Shabelman
TheDeal.com
5, Jun 2008
It has been some time since foosball tables and rooftop keggers were staples at Silicon Valley startups, but with the dark clouds over the U.S. economy, VCs are cracking down on their portfolio companies more than ever in an effort to bolster them against the downturn. "We're telling our portfolio companies, 'Don't spend a dime more than absolutely necessary,' " says Bruce Cleveland, a partner with InterWest Partners LLC.
Because of uncertainty about how long the weakness will last, Cleveland's Menlo Park, Calif., firm is trying to make sure its portfolio companies are funded for 18 to 24 months.
At the same time, the demands placed upon companies seeking later-round funding are toughening.
"Where maybe a year ago, if you had a Series A company, they needed to have 25 customers and some sort of pattern of increased revenue," he says. "Today you need 50 customers on board and double the revenue that was required before for a company to be invested in at a reasonable up round.
"That demonstrates to me some hesitation and anxiety in the private capital market that they want to see more tangible progress before they're willing to dive in," Cleveland adds.
Will Price has been on both sides of the VC table. A former general partner with San Francisco-based Hummer Winblad Venture Partners, Price is now CEO of Widgetbox Inc., a startup that helps people build and distribute widgets, or code that can be placed within a Web page. The San Francisco-based company raised $8 million from Hummer Winblad, Menlo Park-based Sequoia Capital and NCD Investors of Danville, Calif., in a Series B round in January.
"I'm much more mindful of how we spend our money and the scrutiny with which our investors may look at our results and our achievements," Price says. "If you have to go out and raise the money, you want to be in control of your own destiny as much as possible. If you need money, you're at the mercy of the market. If you can be profitable and not need to take the money or you can push out your time frame for when you need more money, the longer you can go the better."
Ashkan Karbasfrooshan, president of Montreal-based WatchMojo.com, which produces and syndicates video programming, says he isn't sweating the downturn so far but has found that terms have become less friendly at his bank.
"When it comes to startups who are at the mercy of financial institutions and are using credit lines, it's not really good," he says.
"Banks have changed their tune quite a bit. Things I was told weren't a problem a few weeks ago, now they're telling us, 'We can't do those things.' "
Some VCs and entrepreneurs say they are more sanguine than others about the future, largely because their investment focus or performance shields them from economic conditions.
Jeff Clavier, founding and managing partner of Palo Alto, Calif.-based SoftTech VC, says he doesn't expect much impact from economic weakness because he invests in companies that typically transition from an idea to a business and are not yet focused on monetization.
Clavier says one of SoftTech's portfolio companies, dog-owner resource Web site Dogster Inc., has actually seen its revenue strengthen over the past few months.
Clavier says he's assembling a funding round for an online job listings company, a category that typically suffers during economic downturns because employers aren't hiring as much, but he doesn't worry about it.
"If there was a massive recession, it could take a hit," he says. "But this is a small company that needs minimum infrastructure, they don't need to hire a bunch of people, they'll make money from day one and they'll have 18 months of runway with the money we're putting together."
Alex Zelikovsky, chief operating officer at MyThings Inc. of Menlo Park, Calif., says his company has yet to feel the pinch from the weak economy because of the nature of its business, which lets people organize their possessions online. The company, which raised $8 million in funding from Accel Partners and Carmel Ventures in 2006, makes money through advertising, helping people find services and accessories for all of their stuff.
"For a company that's meeting its goals and objectives, there's no real shortage of funding," Zelikovsky says. "Good ideas and good companies are still at a premium in Silicon Valley." |
