Start-Ups Feel VC Squeeze
January 5, 2009
As venture capital firms suffer through the credit crunch, the companies they have invested in, including financial technology start-ups, are finding it difficult to secure additional funding.
For example, New York-based Trading Metrics, a latency-measurement technology provider with paying customers and a distribution deal with Thomson Reuters, recently ran out of money and is reorganizing as a smaller shop with three developers.
In October, leading venture capital firm Sequoia Capital called an emergency meeting for its portfolio companies. In a PowerPoint presentation that has been widely circulated on the Internet, the firm predicted a slow recovery and suggested that B and C funding rounds will be smaller and customer uptake slower. Start-ups, said the firm, will need to cut spending and become cash-flow positive.
Experienced start-up heads and technology investors interviewed by Securities Industry News all said that young companies will have to hunker down and reduce cash burn to survive in the current environment.
Rob Stavis, a financial services-focused partner at Bessemer Venture Partners in Larchmont, N.Y., says that the current problems are a reminder to run businesses intelligently. "We are telling our portfolio companies to reduce costs, but we are always trying to make the capital go as far as possible," he notes. "The rules you learn in times like this are reminders of the best practices for running a business--spend carefully and invest in highest-value-added activities for your customers."
Stavis sees openings to invest in companies that didn't think they needed outside funding but now want to build up their balance sheets-both as a cushion and to reassure prospects about their financial health. It is a good time, he adds, for strong companies to acquire weaker ones and hire high-quality developers who have been laid off.
Market participants agree that money is still available for exceptional ideas, concepts that will have rapid return on investment, and companies with a deep roster of clients.
Portfolio Pruning
Jeff Hudson, CEO of data analytics provider Vhayu Technologies Corp., points to a general bifurcation among VC firms. Those that enjoyed the economic bubble but don't have an outstanding track record are scaling back, says Hudson, whose Los Gatos, Calif.-based company is the fifth he's started up. "They feel the pressure and they are pruning companies they don't think will make it so they can save cash," he observes. While those firms are not looking for new opportunities, a smaller group believes that financial services likely will be the first industry to rebound and sees "great opportunity because of the giant restructuring in financial technology which will occur."
The successful firms that remain in financial services will continue to take a long view and support promising new companies whose products are slated to come to market in three or four years, presumably during a different point in the business cycle, says David Gilbert, CEO of Mantara, a Jersey City, N.J.-based start-up offering a multi-asset-class trading and analytics platform on a hosted basis.
"This is a Darwinian period," says Gilbert. "The big firms always keep some powder dry, so money is available for the best portfolio companies. But firms with marginal revenue models which haven't proven their technology and are a long distance from doing so--and haven't proven the existence of a market, or whose market has disappeared--won't make it." A veteran of several technology start-ups, Gilbert divides his time between Silicon Valley, where he knows many of the venture leaders, and New York.
