A Tough Chase for Venture Capital – Early Stage Funding Is Hardest for Start-Ups to Find

Fred F. Korangy has stopped looking for money. The chief executive of College Park-based LogicTree Corp. visited more than 90 venture capitalists in a span of nine months, and they all said no.

LogicTree’s telecom software, which allows users to search for information using voice or text commands, is not sexy enough, Korangy was told. Venture investors said LogicTree would get no funding because there is not a $1 billion market for the product, the sales team needed more experience and Korangy’s "elevator speech," a term for selling a venture investor on your company in one minute or less, lacked power.

By Ellen McCarthy
Washington Post Staff Writer

http://www.washingtonpost.com/wp-dyn/articles/A4109-2004Feb1.html

"It was the worst consumer of my time, unfortunately," said Korangy, who traveled up and down the East Coast to land venture money.

Korangy’s experience is a familiar one to many local entrepreneurs trying to raise early stage investments. Venture investing dropped off dramatically after the implosion of the tech bubble. Start-ups, once the darlings of venture capital firms everywhere, have taken on a minefield-like image, risky and unlikely to hold big rewards. In the last three months of 2003, only 14 percent of all venture funding in the Washington area went to companies that had not received previous investments.

Nationally, the story is much the same. Of all the venture capital handed out in 2003, only 19 percent of it went to first-time fundings, according to the MoneyTree survey released last week by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association. In the fourth quarter of 2003, 163 companies across the nation landed a first round of funding.

"The chance for success from a start-up in its earliest stage has always been and will always be a difficult path, paved with risk," said Mark D. Ein, chief executive of District-based Venturehouse Group. "All of the things that are necessary to make your way from an early stage company to a successful company . . . it’s harder along every dimension."

To get funding now, Ein said, start-ups usually have to have an experienced team, an attractive market, an interesting technology and some proof of customer acceptance. And because young, innovative companies held more cachet during the boom, early stage investors were able to get bigger valuations when start-ups went out for second and third rounds of funding, Ein added, a dynamic that no longer exists.

Established companies looking to expand gobbled up the bulk of venture capital invested locally. During the fourth quarter, 60 percent of the $209 million piped into Washington area companies went to companies that have already had at least one round of venture funding. Most used it to expand the business: Hire more staff or goose the marketing budget. Software companies still dominate the local venture landscape, drawing 37 percent of the $792 million invested during 2003. Telecom companies drew $103 million, or 13 percent of local investments last year, outpacing the biotechnology industry, which garnered $94 million.

CreateHope Inc., a Bethesda firm that sells technology to manage corporate philanthropy efforts, was among the eight companies that landed first-round funding during the fourth quarter of 2003. The company was founded in 1999 and had already developed a list of notable clients when its executives sought venture funding last summer. Adam Goozh., CreateHope’s chief executive, said that proving the company could survive tough times helped it eventually land $2 million from North Carolina-based Frontier Capital LLC and individual investor Ed Crutchfield, the former chief executive of First Union Bank.

"We spent a lot of time and a lot of heartache getting to where we were. If it was our first year, it would have been a whole different story," Goozh said. "We had some friends and family to support us, but we were also very lean, and some of us didn’t get paid for three and a half years."

Digital Sandbox Inc., a five-year-old Herndon software company, made its first attempt to raise venture funding in 2001. But after making about 10 presentations with no luck, the company returned its focus to gaining customers, a move that chief executive Bryan S. Ware cites as key to its fundraising success this year. In 2003 the company raised $1.2 million, significantly less than the $3 million it originally sought, from Monumental Venture Partners LLC.

"There is a tremendous demand for follow-on funding," said Roland Oliver, president and chairman of Monumental. But conditions for start-up funding should improve soon, he added. "I believe in about six to 12 months we’ll see a return to early stage investing."

Jonathan M. Silver, managing director of District-based Core Capital Partners, said he expects all types of investing activity to pick up significantly in 2004. Landing seed money will still be challenging, he said, but many venture capital firms have "completed the triage" needed by struggling portfolio companies. That process, he said, clears the way for new deals to be made.

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