Venture Capitalists See an End
To Entrepreneurs' Wonder Years
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
NEW YORK -- Daniel Giordan isn't worried about the state of the stock
market, but perhaps he and other hopeful entrepreneurs should be.
FirstSite, the Web-design firm Mr. Giordan is developing in Southbury,
Conn., may be a winner and attract the venture capital it needs. But according
to a panel of venture capitalists gathered here for Internet World, the bar may
be higher now that the investing environment that was so friendly to
entrepreneurs is changing.
George Zachary, a partner at the Menlo Park, Calif., venture firm Mohr,
Davidow Ventures, said he is seeing ominous signs that entrepreneurs are
placing values on their companies that are higher than venture capitalists are
willing to pay. So far, the change has manifested itself not so much in the
amounts that young companies can raise, but in the percentage ownership that
venture capitalists are demanding for their money.
Historically, Mr. Zachary said, venture capitalists have taken about 60% of a
company in which they've invested -- but the unprecedented amounts of
money chasing good ideas and the competition to invest in the companies with
those ideas has pushed that level down to about 40% in recent years. Now,
given the turmoil on Wall Street that has taken a bite out of the valuation of
many public Internet companies, the atmosphere may once again be beginning
to favor venture capitalists. Of late, Mr. Zachary said, he's seeing more and
more deals done with venture capitalists taking stakes closer to the 40% level.
One of the reasons for the pro-entrepreneur environment that developed was
the enormous flow of money into venture-capital funds, which in turn allowed
an unprecedented amount of investment. In the first half of 1998,
venture-capital firms put $6.8 billion into new companies, compared with
about $8.5 billion in all of 1997, according to a survey conducted by Big Five
accounting firm PricewaterhouseCoopers.
Mark Gorenberg, a partner at San Francisco's Hummer Winblad Venture
Partners, said the money that venture-capital firms have to invest won't go
away because most of it has been committed to the funds for at least three
years, but he added that the money may start to flow other places besides
start-up companies. Although Mr. Gorenberg's firm specializes in start-up
ventures, there are other firms that may choose to put some money into badly
beaten-down shares of companies that are already public.
Neil Weintraut, a partner at San Francisco's 21st Century Internet Venture
Partners, said one trend that will continue or even accelerate is the importance
of time to market. "The stakes have accelerated and the time to market is six
months," he said. "If you thought of it, then at least three other people have
thought of it just in the U.S. -- and probably a few other people [have]
internationally." Therefore, he said, the important thing is to get a product
onto the market and claim victory.
All three venture capitalists on the panel agreed that the number of companies
seeking funding hasn't changed -- it's the type of deals getting funded that has
changed.
"Deal flow continues at a maniac pace -- I get three to five business plans a
day," Mr. Zachary said, but added that funding for companies such as Yahoo!
Inc. or CNET Inc. that create Web content is on the decline, while companies
providing Internet services are increasingly popular. For example, Mohr
Davidow recently funded Critical Path Inc., which provides e-mail services
for corporations.
Such Web-based business services represent an important new category, he
said, because corporate information-technology managers are overloaded and
looking to turn over some of their operations to outside service companies.
Last year and this year, Mr. Gorenberg said, the market was still in the dawn
of the Internet age -- but now it's more "early morning."
Investors and entrepreneurs, he said, "have had a first cup of coffee and are
more sober."
What that means for entrepreneurs is that the land-grab mentality that had
entrepreneurs rushing out to claim a piece of the Web -- any piece of the Web
-- is over. Now there will be much closer analysis of business plans and
potential markets, and less and less room, Mr. Weintraut said, for companies
that offer virtual analogues of real-world market niches.
"What we're looking for here is a radical change in the business model," he
said. In the physical world, for example, publishers expect consumers to pay
for information, but on the Internet a business might pay people for coming to
its site and then make money by delivering that audience to advertisers or
others seeking to reach tech-savvy surfers.
Still, if the crush of people lined up to talk to the panelists Friday was any
indication, there is no shortage of confident entrepreneurs convinced they
have the next great company. Mr. Giordan, for one, is certain he'll eventually
get the money he needs.
The recent market turbulence is somewhat worrisome, he said, but added that
"we're still in a place where the market is strong on the venture front." |
