Do you see the glass as half empty or half full? If you're in the former camp, you may view the tech wreck as the death knell for early-stage funding. If you're in the latter camp, you probably see a much different picture. Despite the tumult, cash is still available. But you need to give investors a reason to invest.
Sunil Dhaliwal, a senior associate with Battery Ventures, a Wellesley, Massachusetts, venture capital firm with $1.8 billion under management, looks at a half-full glass.
"If you believe early-stage funding can't be found, that's tantamount to saying there's no more innovation left to be funded," says Dhaliwal. "It's highly unlikely that 2001 is the year that innovation will cease to exist."
Of course, there are caveats. Investors want more experienced management teams, so first-time entrepreneurs will have a hard go. Also, investors are looking to capitalize on less crowded niches and are avoiding me-too companies. "The [best] candidates are those focusing on problems or opportunities that will crop up in [the next] 18 to 24 months," says Dhaliwal.
Tighter screening means fewer deals, but an optimist sees the silver lining. If the number of firms raising early-stage venture capital goes back to levels seen in 1996, '97 and '98, then 2001 could be the year when things finally return to normal. That's welcome news for businesses hoping to thrive in the post-New Economy.
The "PricewaterhouseCoopers MoneyTree Survey in Partnership With VentureOne," prepared exclusively for Entrepreneur, is proof that funding is still out there. By culling the firms with the most early-stage deals in 2000, we offer insight into the VC firms most likely to infuse your business with the cash it needs. (See "Top 100 Venture Capital Firms for Entrepreneurs")
Picking a VC firm, however, takes more than simply pointing at a name on a list. The most important thing is to find a firm that's a perfect fit with you and your business. The following three entrepreneurs did the legwork, and the following three investors liked what they saw--companies that complemented the investment strategies of their respective firms. When the two sides came together, they made very successful businesses--and that means everybody benefited.
Playing His Tune
Steve Wood & Gerry
Djangos Records & OVP Venture Partners
When Steve Wood bought Portland, Oregon-based Djangos Records in 1999, he envisioned a future for the store that went beyond used vinyl records and obscure indie bands. Wood, 36, wanted to turn Djangos into the industry's most successful independent retailer. But there was just one problem: He needed cash.
Meet Gerry Langeler of Kirkland, Washington-based OVP Venture Partners. Langeler had funded Wood's first venture--a software company--and liked Wood's entrepreneurial spirit. "We admire Steve's attitude and drive," says Langeler. "Steve is a scrappy competitor."
Djangos also represented an attractive opportunity for OVP. "This business will do better in a downturn because people are more price-sensitive," says Langeler. "[Djangos] is an investment that will retain value, because it has protection on the downside that we almost never see."
Thanks to lead investor OVP and a few other VC firms, Wood's company received $9 million in first-round financing last year. Djangos (named after legendary guitarist Django Reinhardt) now has 19 stores in five major metropolitan markets, a Web site that lets customers access all the stores' inventories, and projected revenue of $70 million for 2002. "What makes Djangos unique is our relationship with customers," Wood says. "They come to our store to buy and sell eclectic products that are out of print or hard to find."
Langeler's hands-off approach has worked out perfectly for Djangos. "The last thing we want to do is run the company," says Langeler, who is a Djangos board member. "We have a strong influence, not control. We're just here to write checks and pour fuel on the fire."
Kirk Huntsman & David
Dental One & ABN AMRO Private Equity
Getting money is like pulling teeth. At least, it feels that way. Thankfully for Kirk Huntsman, 43, getting expansion capital for his dental practice consolidation and management company, Dental One, wasn't nearly that painful. When David Bogetz of ABN AMRO Private Equity in Chicago came looking for Huntsman, he offered more than just the financing Dental One needed; he also brought plenty of business savvy to the table.
Designed to relieve management headaches, Dallas-based Dental One takes over dentists' daily business matters, such as hiring employees and negotiating leases. After starting the company in 1995, Huntsman and his co-founders realized they had tapped into a huge market and, more important, that their business model was working.
As it turns out, Bogetz and ABN AMRO were on the lookout for a dental practice consolidation company to invest in. Bogetz contacted Huntsman after hearing about Dental One through a Dallas health-care lender. The company and its principals had all the markings of a good investment for Bogetz: a proven business model, great business sense, and a stellar vision of the future. "We really liked that Dental One was run by businesspeople who had dental practice experience," says Bogetz. "Kirk has lots of ideas and energy--and he's moving this business forward. It's better than having a CEO who has no ideas and no vision. I've [experienced] it both ways, and [Kirk's] way makes successful companies. The other way is how you lose your money."
Dental One and ABN AMRO began negotiations in 1999, which led to $4 million in financing in March 2000. By year's end, Dental One's sales were $45 million. Who'd have guessed pulling teeth could be so lucrative?
Take The Lead
Lucinda Duncalfe Holt & Henry
Destiny WebSolutions Inc. & Blue Water Capital
Although he regularly attends venture forums, it's unusual for Henry D. Barratt Jr., managing director of Blue Water Capital, to find a company worth pursuing. So what moved him to not only inquire about Destiny WebSolutions, an Internet solutions provider, but to compete with others to fund the company? It had a lot to do with what Barratt saw in the company's president and CEO, Lucinda Duncalfe Holt.
"We first saw them at the Mid-Atlantic Venture Fair," explains Barratt. "[Duncalfe Holt] had a strong knowledge of leading people. She was a team-builder."
The team is the essence of Conshohocken, Pennsylvania-based Destiny's corporate culture. "It's [about] enabling everybody from senior management to associates and empowering them to do their jobs," says Duncalfe Holt.
Barratt also appreciated Destiny's profitability. "They didn't need the money to make payroll," he says. "They needed it because they wanted to expand." Once Blue Water Capital pumped $750,000 into the company, Duncalfe Holt went after that expansion--2000 sales were $17.5 million.
Barratt says good communication is the cornerstone of their alliance. "We've [left] situations that were great investments but where we felt we couldn't communicate effectively with the management team," he says. "It's not the easy times we're concerned about; it's 'What if something hard happens--how will we work through it together?'"
For information on new venture capital programs, check out "Bulletin Board."
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in Partnership with VentureOne"
In the first quarter of 2001, early-stage, pre-IPO companies raised less money than they have since the second quarter of 1999. According to the "PricewaterhouseCoopers MoneyTree Survey in Partnership With VentureOne," total equity financings in venture-backed companies fell to $10.1 billion in the first quarter of 2001, a 40 percent drop from the last quarter of 2000. That represents the steepest quarter-to-quarter drop in history in terms of absolute dollars.
What does that mean for companies seeking financing? The number of businesses receiving early-stage funding dropped from 453 in fourth quarter 2000 to 235 in first quarter 2001, a 48 percent decline. Yet the median dollar amount each business received fell only 13 percent, from $10.9 million to $9.5 million per company (see below for first quarter investments for the last three years). So while it's more difficult for companies to get backing, those that do, get plenty of it to grow rapidly. Plus, industry sectors like networking, telecommunications, consumer and business services and software continue to attract huge amounts of funding compared to mid-1990s levels.
The dramatic drop-off in investing doesn't necessarily
indicate a significant economic downturn. Setting aside the
Internet gold rush of the last two years, the current climate is
still more aggressive than historical norms and will likely remain
that way. The bottom line is that entrepreneurs need more than just
a new idea to get funding.
Venture Capital Practice, PricewaterhouseCoopers
Equity Financing ($M)
firms, corporations, private placement and individuals into companies that
have received at least one round of professional venture capital.
in Partnership with VentureOne"