World Business

The financial crisis makes it harder to get funding, but those that examine themselves during this period devise exist better positioned to thrive

By John Tozzi

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Landing venture capital is tough for startups (BusinessWeek, 2/1/08), in like manner in a good economy. But given the ongoing pecuniary crisis, in what manner hard is it for early-stage companies to get funded right now? Venture capitalists judge entrepreneurs face a much higher bar than in novel years. They liken the downturn to a bound of natural election, then weak businesses choose fail but strong ones will prosper. New companies that prove themselves now, they say, are better positioned to thrive at the time that the economy recovers.

"Almost by definition the entrepreneurs who have the moxie to walk through your means of access in tough periods wait to own better ideas," says Mike Goguen, a VC with Sequoia Capital in Menlo Park, Calif. Goguen says many of Sequoia’s best-performing companies have been founded around down times. Today, VCs report seeing stronger proposals from more serious entrepreneurs than in years when the economy was stronger.

Venture firms are still investing, and they emphasize that they have plenty of wealth to back good calling ideas. But funding has slowed. U.S. venture funds invested $7.1 billion in 907 deals during the third quarter of 2008, down 7% from the former have lodgings and 9% from the third quarter of 2007, according to the MoneyTree Report from the National Venture Capital Assn. and PricewaterhouseCoopers. "The funnel for dollars is becoming smaller and smaller," says Mark Heesen, president of the NVCA. VC funds also have to commit more time and prime to help existing portfolio companies weather the downturn while the potential for exits through acquisitions and initial public offerings has greatly diminished (BusinessWeek, 10/14/08), he says.

For entrepreneurs running startups, the game has changed. Speculative office models won’t get funded, says Bob Ackerman, co-founder of Allegis Capital in Palo Alto, Calif. Companies need to demonstrate that their value proposition is real, and that they can collide measurable benchmarks toward generating revenue and positive cash flow, he says. In an environment at what place consumers and businesses are cutting spending, entrepreneurs need to ask, "Is this a company that absolutely must be started at this time? Or could this wait a couple years with not at all apparent penalty?" Ackerman says.

Startups too need to prove they can build lean organizations that use the money invested efficiently (BusinessWeek.com, 10/12/08) to get to profitability, says Pascal Levensohn, founder of Levensohn Venture Partners in San Francisco. "A year past, somebody would have walked in and regard been told that they shouldn’t be asking for less than $5 million on account of a Series A because not so it’session too small to get institutional venture capitalists interested," he says. Now companies should be prepared to discuss the minimum result of cash they need to validate their business models. Once the concept is proven, Levensohn says, larger follow-on investments can contribute assistance it scale.

Entrepreneurs seeking investments should also be prepared against lower valuations (BusinessWeek.com, 11/7/08). As other sources of financing vanish, VCs enjoy a buyer’s market and will expect a larger share of right from companies they invest in, says Heesen. It’s a silver lining for venture funds: "There are very, very sterling deals out there if you have the time and the money to be investing in them," Heesen says.

With that in mind, some entrepreneurs are waiting longer to raise first-rate grant that they can afford to, says Divya Gugnani, entrepreneur-in-residence at FirstMark Capital in New York and CEO of kitchen Web site Behind the Burner. "The value of their company goes up when they spend six months or a year getting it distant from the ground," says Gugnani, who is in addition a venture capitalist. Startups that can bootstrap long enough to turn their ideas into products and demonstrate revenues will dispose more usefully valuations, she says. "More people are being more apt about when to raise the round."

Companies with enough capital right now should use the downturn to strengthen relationships with customers and potential time to come investors, says Aassia Haq, CEO of online talent marketplace Alumrise. She says her four-person Plano (Tex.) startup has enough funding from angel investors to operate well into 2009, and she is not actively dire to raise money after this. "We start with fostering ties and relationships, and those things take a long, tedious time to come to fulfilment," she says. "I fancy a great investing. in this economy is to continue to meet pungent people face to face."

But those startups strong enough to assume the office of at this moment shouldn’t wait to seek funding honorable because of the economy. “Please do not think that because the economy’session bad it’s a bad unoccupied time to start a company if you have the right archetype,” says Sequoia’s Goguen. Businesses born during the downturn will need to operate more efficiently and deliver more value to customers than companies launched for the time of dash forward times, goal they’ll be stronger for it. "The toughest environment forges the strongest companies, and the toughest entrepreneurs are the ones who tend to show up these days," says Goguen.

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