Ailing Start-Ups May Soon Lose VCs’ Infusion

When do you pull the plug on a fledgling company?

That’s the question more venture capitalists are asking in the wake of the continuing carnage among publicly traded “dot-com” companies.

“I’m coming across this every day,” said Richard Koffler, head of a small Los Angeles incubator for new companies. “VCs are telling companies they don’t have the time and they don’t want to put more money into them.”

It isn’t a matter of a shortage of funds: Venture capitalists have enjoyed stellar returns in recent years, and they are sitting on a huge pile of cash from investors. Venture funds raised more than $30 billion from investors in the first half of this year alone.

Many start-up Internet-related businesses have already received initial funding from venture capitalists--with the goal, of course, of eventually going public.

But with the market’s appetite for new dot-com stocks dramatically reduced--and the e-business success rate a long way from what many had projected by this point--venture investors increasingly are identifying companies in their portfolios that will never pay off.

“It’s a brutal environment. The endgame isn’t as valuable as we thought it would be,” said Bill Elkus, partner with Idealab Capital Partners, the venture arm of Pasadena-based tech incubator Idealab.

Failure is nothing new in the realm of technology, of course. Still, the reluctance of venture investors to continue funding some Internet-related start-ups might catch some of those businesses by surprise, forcing them to scramble to find other sources of money--or fold.

Venture capitalists “don’t want to throw good money after bad,” said Ravin Agrawal, partner with East-West Capital Associates, a Los Angeles venture fund. “There are a lot of VCs right now pulling away.”

Not surprisingly, most venture investors don’t like to talk about the companies they’ve already singled out as losing bets.

“No venture capitalist likes to advertise which deals aren’t working out,” Elkus said.

David Cremin, a partner at Zone Ventures, a $150-million Los Angeles-based fund that invests in early-stage companies, said he and his team decided to cut off one of its portfolio companies, MValue, a Culver City-based firm that offered Web subscribers prizes in return for allowing advertisers’ banners to appear on their screens.

While Cremin said he still believes in the company, it was unable to attract other investors for additional financing. MValue, which had about 30 people, recently shut down.

“It’s sad. I think it’s a good company, but the market isn’t supporting them,” Cremin said. “They have a great CEO, but others haven’t caught their vision. We can’t just keep throwing money at them.”

He said Zone continues to support other portfolio companies that have met business targets and have attracted other capital, such as Los Angeles-based online retailer EStyle Inc., which Cremin said just raised a $25-million fourth round of funding after a public offering slated for this year was postponed.

“We’ll always support a company that is executing its vision,” he said.

Indeed, even as they pull the plug on some ideas, venture capitalists insist they also are reserving funds for other fledgling companies in their portfolios.

And of course, many funds are actively funding ideas in Internet-related sectors where the public demand for stocks remains high--for example, in networking hardware, wireless communications and fiber optics.

But telecom-related new businesses are a worry for some venture investors. The high-yield junk bonds of some telecom firms have plunged in value recently, reflecting Wall Street’s fear that some telecom sectors have become saturated with competitors.

“The telecom category is very capital-intensive,” said Eric Harrison, a venture capitalist with Crosspoint Ventures, a Woodside, Calif.-based fund.

“They are a struggle to finance, and that’s the same for everyone including us,” he said.

“Still, right now we don’t have a single investment where we are having to choose our favorite child” over other companies in the portfolio, he said.

But if the stock market stays tough through next year, “It will be a washout,” Harrison said.”

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Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.