Cash scarcer for new firms
In recent months, some start-up technology companies have died or gone into comas after running out of money, a possible early sign that the resurgence in venture investment may be coming to an end.
File123 is counting its days. Edgeio was edged out. TripUp has fallen. BrightSpot went dark. Firebrand flamed out and Ezmo is no more.
Industry analysts say this year will bring a big wave of start-up deaths as the credit crisis gripping the financial markets makes investors cautious in other areas.
“This is the first time since the Internet bubble burst that Internet companies are facing serious challenges,” said Jessica Canning, global research director for Dow Jones VentureSource.
The slowdown will affect Los Angeles, which has become a technology center for companies that put entertainment and advertising on the Web. Now such companies are frequently given months, not years, to prove concepts, with wary venture capitalists pickier about where they invest.
“It’s more cutthroat now,” said Adeo Ressi, an entrepreneur who runs thefunded.com, a site that tracks venture firms. “If you don’t show hockey-stick growth, you don’t make it in this market.” The chart pattern Ressi referred to signals impressive growth at a fast pace.
In the last quarter of 2007, venture capital investments in Southern California companies fell 25%. Los Angeles-based information services companies, which include online entertainment and advertising ventures, attracted 13% less funding than the same time a year earlier.
Only one technology company had an initial public offering in the first quarter of this year, down from nine the same time last year, according to an April 1 report by the National Venture Capital Assn. The group also found a slide in mergers and acquisitions.
Matt Dusig, who sold online survey operation GoZing for $30 million three years ago, needs $500,000 to keep his Encino company, File123, alive. He has a chief executive ready to take charge but nobody interested in betting on the Web-based file storage manager. “We don’t want to see it die out,” Dusig said.
The investment slowdown comes after the biggest start-up funding boom since the Internet bust. Venture funds raised $35 billion in 2007, the biggest hoard since 2001.
But the volatile stock market has spooked many investors and made it more difficult for companies to find buyers or go public. “You can’t get an IPO out when there are a lot of investors sitting on the sidelines,” said Mark Heesen, president of the National Venture Capital Assn. Without exit opportunities, venture firms need to keep funding older firms at the expense of younger ones, he said.
Investors are making tough choices about which firms to finance and “which to abandon to its fate,” said Mark Cannice, an associate professor of entrepreneurship at the University of San Francisco, who surveys venture capitalists’ confidence.
His most recent survey, in January, found confidence at the lowest point in four years.
Investors’ new caution could ricochet through the start-up world, which brings new jobs and innovation.
“These young firms are the engine of growth for the economy,” said Garth Saloner, director of the Center for Entrepreneurial Studies at Stanford University’s Graduate School of Business. Some of the current generation suffer from the same problems that beset those in the last Internet boom -- many are creating near-identical businesses or have only vague ideas of how to generate revenue.
“Tens of millions of dollars are put into them, but they aren’t sustainable and they can’t continue to go back to the well,” said Jon Fisher, an entrepreneur who sold his most recent company, Bharosa, to Oracle Corp. in July.
The slowdown is stumping some entrepreneurs, including those who found success in the Internet bubble. Keith Teare, for instance, whose company, RealNames Corp., sold a stake to Microsoft and almost went public in 1999, thought he’d found more success with Palo Alto-based Edgeio, which syndicated classified ads to clients’ websites.
He launched the company in 2006 with $1.5 million and received an additional $3.5 million in September 2006. At the time, investors valued Edgeio at $18 million.
But when he knocked on doors for more money last August, Teare was surprised to discover that the well had almost run dry. Investors didn’t think Edgeio was worth $18 million anymore and offered him a total of $400,000. Teare closed the company instead. He now shares his 4,000 square feet of office space in Palo Alto -- paid for until Aug. 31 -- with aspiring entrepreneurs rather than Edgeio employees.
Matthew Gertner expected to get a second round of funding for his Britain-based file-sharing start-up, AllPeers, in November. It didn’t materialize, so he picked up work on the side while he looked for other investors or a buyer.
He decided to shut down the site at the end of March.
“There’s a strong emotional attachment. It’s almost like getting divorced,” he said. “There’s this huge sensation for entrepreneurs to cling to it and drag it out until they’re absolutely forced to close.”