News and Features
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Rob Weber, Managing Director, Antiphony; Co-founder, Robin Hood Ventures
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Dearth of dollars adds to challenges
for technology startup companies
By Pam George
Rob Weber is all too familiar with the funding issues facing technology startups. He’s been involved with six technology companies, either as a founding team member or as a CEO brought in to grow the business. He is also a co-founder of Robin Hood Ventures in Wayne, an angel investment group focused on emerging growth companies.
So when the 27-year veteran says there have been major changes on the funding scene, it is easy to believe him. “What you have is a dramatic, tectonic shift in the venture capital environment that is affecting financing all up and down the food chain of investments,” says Weber, now Managing Director of Wayne-based Antiphony, a management consulting firm that helps companies create sustainable value through innovation.
Venture capitalists invested $3.67 billion nationwide in 612 separate deals during the second quarter of 2009, according to The MoneyTree™ Report, produced by PricewaterhouseCoopers LLP and the National Venture Capital Association, and based on data provided by Thomson Reuters. The amount was up 15 percent from the first quarter but down 51 percent from second quarter 2008.
All this is sobering news for technology companies seeking startup funds. And their situation is made worse by the fact that bio, pharma and clean energy startups are getting all the media attention.
“Technology companies are taking the biggest hit,” Weber says. To present themselves as an attractive candidate, startups must spend more time laying the proper foundation.
Hurdles are higher
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Mark deGrandpre, Director of Investments for Physical Sciences at Ben Franklin Technology Partners
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While there are fewer venture capital firms today, and they have less money to offer, there is no shortage of entrepreneurs, thanks in part to layoffs, early retirements and a tight job market forcing people to create their own opportunities.
Mark deGrandpre, Director of Investments for Physical Sciences at Ben Franklin Technology Partners in Philadelphia, says VC firms evaluating startups are still looking at the same qualifiers: a competent team, a solid business plan, the market potential, the competitive landscape, intellectual property, strategy and positioning.
While entities such as Ben Franklin still target early stage companies, many VC firms now want companies further along in the growth cycle, says Alan Rihm, Founder and CEO of CoreDial in Plymouth Meeting, which provides Hosted PBX, Voice-over IP and data services, and is the maker of VoiceAxis, a multi-tenant PBX and VoIP management software for service providers and enterprises. CoreDial is Rihm’s fourth startup in the area. Investors expect businesses to come the table with a developed product, Rihm says. Or they want a quick, easy-to-understand development process.
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Alan Rihm, Founder and CEO of CoreDial
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That’s a high hurdle if the product or service is innovative. Consider Philadelphia-based Human Network Labs’ PixieEngine, which can precisely locate people and objects anywhere in the world without infrastructure, satellite or cell towers. It can work via Bluetooth, so you can get the data on your mobile phone. Unlike a GPS tool, the technology works indoors as well as outdoors. Find your child, your keys, your car or your cat. Learn who is sitting beside you at an event. Point to a movie poster and watch a trailer on your phone.
If you think it all sounds rather Star Trek-esque, you are not alone. Some investors have found the market potential hard to grasp. “There isn’t an existing market that I can show you,” says Carlos Garcia, CEO of Human Network Labs. And most technology investors lack the patience of pharma or bio investors, who expect a lengthy development process. Human Network Labs did receive funding from a VC firm outside the Philadelphia area. The company is conducting a PixieEngine pilot program involving the elderly and is working with the University of Pennsylvania to start another pilot program.
Pilot programs with potential customers can make it easier to securing financing, Weber says. Early contracts help demonstrate some level of customer interest. Ideally, the startup has a contract with the potential customer in hand when it seeks funding. “You need to prove there is a bare minimum of market potential,” Weber says.
Know when to hold ‘em
To make CoreDial more attractive to future VC investors, Rihm opted to “bootstrap” the company, initially funding it with his own money, angel investor funds and traditional bank loans. Although the bootstrap effort lasted longer than Rihm might have wished, there’s been value in “stretching the dollar as far as we could,” he says. “We’ve created a solid foundation, and we’ll start 2010 in a cash-flow-positive environment.”
Weber would approve. Technology companies can often create substantial offerings with only a little cash to get them going. Gather money from friends and family and aim for a low development cost, he says. Outsourcing can cut down on overhead.
Stay on a manageable track, Weber advises: “Companies should not get too far ahead of themselves. A company can operate at a break-even cash flow level and stay in business for a long time. Be nimble and creative.” Once a company proves itself to be sustainable, it is more attractive to investors.
When companies do secure funding, they should expect investors to set milestones. Like a grant, the invested funds are directed toward certain goals. Companies must show results to get funding for the next leg of the journey.
Those who can afford to self-fund may find themselves continuing to do so until the market improves. In the current market, many have an inflated idea of their company’s worth and are insulted when the VC firm values it lower. “There is a dance between buyer and seller,” deGrandpre says. “Whoever has the most leverage in that dance has the upper hand in negotiations. If you run out of money, you’ve got to make a deal. It is a marketplace.”
Experience counts — or does it?
While the management team’s qualifications always carries weight, it’s not as big a factor in the technology realm as it is in pharma. At Human Network Labs, managers have at least one master’s degree and some have doctorates. Still, “at the end of the day, people are interested in results,” Garcia says.
For each of Ben Franklin Technology Partners’ criteria, there are “headwinds” and “tailwinds,” factors that either hurt or help the investment case, DeGrandpre says. For instance, a first-time entrepreneur with unseasoned advisors is facing a headwind. A strong patent portfolio, meanwhile, is a tailwind — a good thing. Growing, accessible market? Tailwind. Me-too product with little differentiation from competitors? Headwind.
“Rarely does a company have all tailwinds in its favor,” he says. “In the end, all factors are summed together and a composite picture emerges that either speaks in favor of an investment or of a rejection.”
Are a business owner’s past failures a detriment? Not necessarily. Garcia points out that the road to success is full of failure. In some cases, a business failure stemmed from market conditions or other matters; it had nothing to do with the owner’s abilities, deGrandpre says. And some companies were simply ahead of their time.
IPO is not the likely exit strategy
The potential for successfully exiting a company can affect whether an investor is interested in getting involved. Today an exit strategy is likely to focus on an acquisition or merger. The days of unabated lucrative initial public offerings are over, at least for now. “We might never get into that situation again, where the returns for this asset class were so inflated,” deGrandpre says. Still, he is “guardedly optimistic” that the past couple of years do not represent an equilibrium and that there are better days ahead, both for investors and entrepreneurs.
“The source of our economic strength is the ability of the entrepreneur to bring his new invention and new productivity to market,” he says. “That need will never go away, but we need to recognize that there will be ebbs and flows.”
Photo of Alan Rihm by Paola Nogueras.
