I’m OK, You’re OK, But We’re Not
Discuss Getting Early Stage Funding After The Bubble
DC -- March 22, 2001)
It’s become conventional wisdom by now that investors are
tightening their wallets and riding out the market downturn now that
the “bubble” has burst. Everyone
says that it’s harder to get deals done and, when they do,
valuations are way down.
is it, then, that when a panel of four investors were asked this
morning whether they’ve seen a decrease in deal flow, two said
yes, but two others said no?
what is really going on in the early stage funding market, anyway?
question was the heart of the matter at this morning’s Netpreneur
Coffee & DoughNets meeting where four leaders in the early-stage
Lukaczyk of Avansis Ventures, Zim Putney of NextGen
Capital, Joan Winston of Steve
Walker & Associates and Jeff Weiss of ASAP Ventures¾discussed today’s investing climate and
what it means for entrepreneurs seeking funding.
Billed as “I’m OK, You’re OK, But We’re Not
Investing,” the speakers explained some of the current
“post-bubble” pressures on investors in order to help
entrepreneurs adapt. As
Netpreneur’s Executive Director Mary MacPherson explained in her
introduction, the idea came from a recent meeting with investors.
“One of the things that came through loud and clear,” she
said, “was their sense that the entrepreneurs knew intellectually
that things had changed, but they seemed to be doing the same things
they were doing a year ago, yet getting different results¾no
Back To The
Why did the panel split 50/50 in their
assessment of deal flow? One
reason is because certain markets are still very hot, such as optical components, data communications equipment and
three areas where Avansis’ Lukaczyk keeps a very tight focus.
Other segments, especially in the dot.com arenas, are less
so, and one reason why many VCs are doing less investing is that
their pipelines are stocked with current portfolio companies, and
they have little time to take on new commitments.
Both pipelines and market space can give two
significant cues to entrepreneurs.
For the former, a rejection may not necessarily reflect on
the quality of your venture, it’s just that VCs will have to be
more selective for a while as they tend and prune their portfolios,
and they’ll be much more thorough in assessing any new deals.
As to the latter, although investors have always tended to
work in markets they know and understand, many of them strayed
during the last three or four years.
Part of a general “back-to-basics” movement in the
industry is that investors are going back to the markets they know
matters,” as Winston puts it, and entrepreneurs
will have to go back to doing extensive homework about investors to
find the ones who know enough to invest in their businesses.”
Yet the main reason why investments are down, and, yes,
they are down overall, is that investors are no longer making some
of the more questionable deals that were being done during the
“A year ago,” said Putney, “We were force feeding the entrepreneurial
system. We, the capital
community, were forcing a lot of money into a system that really
couldn't adequately and efficiently use all that money.”
As a result, a lot of companies, both public and private,
have since fallen by the wayside because they lacked sustainable
Weiss remembered a satiric article he saw in
the New York Times a year
or so ago in which the author parodied some of the more outre
“principles” of Internet mania, suggesting a business plan for a
company that would sell $100 bills for $95.
After initial success, cracked Weiss, “He would
raise his prices to $97 for a $100 bill.
All his financial metrics would look so much more improved
that Wall Street would take him public and the rest would be
ironically, Putney agreed, “Investors were funding a lot of ideas
that were not good, as demonstrated in the marketplace.
Now we're back to looking very carefully at deals, working
with companies we've invested in to make sure they're successful.”
And there’s at least
some bright side according to Winston.
“A lot of the “me too” ideas that were trying to get
big fast and get sold back during the craze are going away.
The noise to signal ratio is getting better.
Maybe people are registering for spring semester instead of
starting a dot.com.”
How Can Entrepreneurs Respond?
investors returning to business basics, entrepreneurs will have to
respond in kind. According
to Putney, “There is still money out there, but people are going
to look a lot more carefully at your idea than they would a year ago
to make sure that it has uniqueness, that you’ve got the right
team and that you're going to have market potential long-term to
make the venture successful.”
means such things as focusing on revenues, re-evaluating businesses
models and, according to Lukaczyk, many entrepreneurs will have to
do a much better job of understanding and explaining their market
dynamics. She said that many don’t drill down deeply enough into
customer needs and competitive dynamics she said, “One of the
things that I'm going to eventually want to do is talk to your
customers, or your potential customers.”
If an investor can’t do that, or can’t get consistent,
meaningful answers, the entrepreneur is not likely to get funding.
than ever before, entrepreneurs will have to prove their case under
scrutiny from all sides¾financials,
markets, management team and more.
“The best opportunities now,” said Weiss, “will be in
building real businesses that customers love, offering sustainable
advantage from disruptive changes in the market.”
idea of disruptive technology is central for Weiss, and the other
panelists as well, because investors are looking for the big return.
“Venture firms,” he said, “have traditionally invested
in disruptive change. Just
having something that is incremental is not good enough.
There certainly were many companies and investments in the
momentum market of last year which were just incremental, but they
were features, they weren't companies.”
a central part of the case entrepreneurs will have to make in order
to get funding now. First,
that they understand their market, including pain areas and
opportunities; second, that they have a realistic business model for
satisfying it; and, third, that the potential is significant enough
to interest an investor. This
need for an attractive value proposition is part of what’s driving
another market factor, one that entrepreneurs are simply going to
have to get used to¾much lower valuations.
an entrepreneur,” said Winston, “you're selling your risk.”
And according to Weiss, “venture money has gotten much more
expensive. For a brief
window of time, it was somewhat less expensive, now it's very
alternatives are customers, partners, channels and other forms of
funding. They are
critical, and they have to be part of the plan.”
customers, partners and channels are necessary for all successful
businesses, VC money actually may not be, and every entrepreneur
should carefully answer a question posed by panel moderator Esther
Smith of Qorvis Communications:
“Do I have a venture-style company or do I have a good business? A lot of really wonderful businesses fall into the ‘good
agreed, “There are a lot of businesses I've been seeing out there
that could probably be bootstrapped with friends and family and have
a nice $10 million or $20 million revenue stream.”
you’re going for the big score, however, and think that it will
take equity investments to get there, consider the panel’s advice,
captured in the event transcript, and be prepared to hear more than
once, “I’m OK, you’re OK, but we’re not investing.”
Copyright © 2002 Morino Institute. All rights reserved.