In tech, small VC rounds here to stay

In the boom years, technology startups worried mostly about how much venture
capital they could raise. Getting the next round of capital was considered a given,
not a battle.

Phil Sweeney Journal Staff

Now tech startups worry
about what little they are
struggling to raise, with
more and more companies
pulling in rounds of $10
million or less.

And while investment
rounds are shrinking,
investors are exerting more
influence and monitoring
more carefully the
developments at young
companies. Investors want
to see progress before
putting together a second-
or third-round deal.

Startups see smaller rounds now because valuations are down considerably.
Beyond that, though, investors seem inclined to put money to work in smaller
doses — even if that means putting together more rounds or keeping a round open
for longer periods.

At one time, a new tech company could raise $10 million or $20 million based on
a business plan alone. Those days are gone — and not likely to return anytime
soon.

"The proving out … is more extensive, and the
size of an `A’ round is smaller than it was
before," said Steve Kelly, CEO of
Cambridge’s DataPower Technology Inc.,
which recently raised $9.5 million in a second
round.

For some new companies, the new rules
mean it’s necessary to create a product
before even approaching VC firms.
Bootstrapping, Kelly said, is in fashion for
newly created companies.

Without free-flowing venture capital, startups
are much more frugal with salaries. Marketing expenses, too, are trimmed way
back.

In this environment, marketing must be done more specifically than in the past,
what Kelly calls "shotgun vs. rifle" results.

Some executives might grumble about having less capital to work with, but others
welcome the challenge.

"We’re seeing dramatic shifts in the mind-sets of our entrepreneurs," said Scott
Tobin, a general partner at Battery Ventures in Wellesley.

Startups realize they have to make do with smaller amounts of venture money,
and they spend accordingly. Tobin said he’s even aware of executives doubling up
in hotel rooms.

"There’s more attention to expenses," said Andrew Sherman, CEO of WebEvent
Inc. of Andover. "There’s more scrutiny and control."

WebEvent, which makes technology used in automated calendering applications,
raised $1.3 million in a recent round. That second round, while not a lot, is
enough for now.

"We certainly asked for more," Sherman said. "But we worked out realistic plans
based on need."

Getting money at all, of course, is a major victory.

Sherman said he knows of a company that was attempting to raise a second
round at the same time as WebEvent. "They’d done 70 meetings with VCs
without a solid bite."

When startups do land funding, they might see it in a greater number of smaller
rounds. This way, investors make sure certain milestones are reached before
additional money is put to work.

In biotech, it is not unusual to see venture investments tied to certain
achievements, such as the completion of a trial or the obtaining of a patent, said
Spencer Feldman, a partner with the law firm Greenberg Traurig LLP.

Feldman wouldn’t be surprised to see this practice become common with
high-tech startups. "There’s nothing wrong with that approach," he said. "It could
be the wave of the future."

Tobin, of Battery Ventures, said the tougher funding conditions aren’t necessarily
bad for startups. What it does, he said, is separate true entrepreneurs who know
how to stretch every dollar from "me-too" company builders.

Startups clearly are working harder to gain even small amounts of venture
funding, but they should be able to keep investors interested as long as they
show progress.

"The investors are looking for real proof — revenue, customers, growth," said
WebEvent’s Sherman.

Copyright 2002 American City Business Journals Inc.

http://www.bizjournals.com/boston/stories/2002/07/22/story8.html