Venture cash? It’ll cost you

The entrepreneurial spirit of 2002 may be summed up in one sentence: "I can always get a job."

That was one of many thoughts shared by a group of four entrepreneurs who sat down with The Seattle Times recently to explain how difficult it was to start a technology company in 2002.

By Tricia Duryee
Seattle Times Eastside business reporter

Joining the conversation were Chris Noble, chief executive officer of Seattle-based Singlestep Technologies; David Parker, CEO of Para3 in Kirkland; Freddy Pacquing, CEO of Ascentry Technologies, a Tacoma company; and Joe Verschueren, who is attempting to restart SimulRing, his Seattle-based company.

Although the four found themselves in slightly different circumstances last year, they all felt similar pressures in a down economy. In particular, they faced the dilemma of turning down money from investors or issuing shares at a price they thought was too low. The result in doing so is called "dilution."

At the same time, customers and corporations cut back and tightened their budgets, making it more difficult to meet heightened investor expectations and secure venture capital or angel funding.

Tom Simpson, managing partner of Northwest Venture Associates, said investors were skittish about making new investments last year.

"They were being extra careful," he said. "Layering on top of that, there was not a consistent theme of what is hot — rightly or wrongly — there’s no consensus out there. There’s not a real trend to follow, and a lot of time is spent caring and feeding their existing companies, collectively making it a difficult time."

Nationally, fewer companies received their first dose of venture capital in the third quarter than in any quarter in the past eight years, according to the MoneyTree venture-capital survey published by PricewaterhouseCoopers, Venture Economics and National Venture Capital Association.

Fourth-quarter statistics are not yet available.

All four of the entrepreneurs admit the year was tough. It was a constant balancing act in which the officers worked hard at warding off the competition and matching expenses with investments or revenue. Here are excerpts from their discussion.

Q. Was 2002 a good time to start a business?

Parker: The timing is interesting. There’s great talent available right now. There are people and space and facilities. It’s a really great time to start a business or a stupid time to start a business. The drawback is none of us are smart enough to tell which….

Verschueren: To Dave’s point, it’s frustrating when you don’t have a lot of competition early on because you have to define the marketplace and then validate that there is a marketplace. And then, if there is a lot of competition, particularly today, investors will say you will never catch these people; you want to be first, you want to be in a new space.

Pacquing: Investors would like it to be a current space that the analysts are covering, and if the analysts are covering it, there’s going to be competition.

Q. Are many entrepreneurs too early for investors or are investors being gun-shy? It seems like investors in 2002 were looking only for startups that already have experienced management teams, customers and developed technology.

Parker: The barrier or bar is very high. They want all those things. The fact is those perfect businesses don’t exist. … What we have to do in this environment is to get to profitability really quickly and prove out the product. The flip side is, I can get money, but it will have to be at such a huge valuation hit or huge dilution hit that I’m really not interested in doing that. That’s the Catch-22. Are we going out and looking for money? The answer is: yes, but.

Q: Wouldn’t it have been better to take a dilution hit and issue more shares, so you can get your business off the ground?

Pacquing: Not necessarily.

Verschueren: Ideally, if you never had to take any outside money, you’d do that in a heartbeat. … To me, there have always been three things that VCs (venture capitalists) have looked for, and recently they’ve added a fourth one: management team, barrier to entry/unique technology and size of market.

The fourth one they’ve added is … what’s the cost of acquiring a customer? You can have all three of the others, but if it takes you two years to sell something, you don’t have a good business. That’s the thing that’s changed the most — the heavy emphasis after the bubble on customer acquisition.

Q: Are investors expecting the investments they make today to make up for bad decisions made during the bubble?

Parker: They are looking for moderate risk with an exit strategy.

Verschueren: I’ve read some stories about what fueled the bubble, and it was that there was an excess of capital and it was competing for a limited number of deals. You couldn’t find people. … Now the supply has diminished — and I mean the number of (startup) companies — I think you will start to see the tide turn and they won’t look for billion-dollar companies.

For example, a company like mine — and it’s not a secret that unless the capital markets changed dramatically and (the number of initial public offerings) really came back to hold — our liquidity event would be some sort of acquisition. That’s something investors will invest in today.

Q: So are you saying investors’ standards have come down this year?

Noble: IPO has become a four-letter word.

Pacquing: For instance, whenever we talk to VCs, of course we paint a huge potential IPO picture, but anyone who reads our business plan can see 15 different ways our company can be acquired in three to five years. Today’s entrepreneur needs to be a lot more intelligent about his plans for other potentials.

Noble: It’s just starting to shift away from IPO and to acquisition, and in general, the focus is shifting away from the exit (strategy). They are looking to fund businesses that will be around and profitable and provide value, and then the exit will take care of itself. You have to walk in every morning thinking you are building a company for the next 20 years. We are all entrepreneurs right?

Anyone of us seriously thinking about retiring at the age 55 or 60? No.

Parker: If there was an exit in three years, would you retire?

Noble: No. So, if I’m going to work for the next 30 years, I might as well work at a company I built and enjoy. That’s an entrepreneur. That’s what you have to be about — the 20-year vision.

Verschueren: I think one of the really emotional thrills is job creation. At the last company I started (ImageX), we went from five to 900. That’s the frustrating thing right now, the Catch-22. The economy is stuck in neutral and I can’t do anything. I can’t hire anyone today because I don’t have the budget to hire anyone.

Q: How hard was it trying to raise money this year?

Pacquing: For a certain period, we stopped looking. But once we went from an idea to a product and a business and had traction in terms of sales and strategic partnership, it became important to take a look at what it will take to grow the business and copy the model into other verticals (similar market segments). It’s extremely difficult now, but it’s getting easier.

Parker: It’s not a good time to raise money. Even if you could raise money, I wouldn’t take it at the dilution I would get.

Pacquing: We’ve actually turned away money because it wasn’t (based on a high enough valuation of the company). We weren’t willing to accept the dilution.

Noble: We restarted the company (Singlestep) in 2001 with six people and grew it to about 17 at end of 2001. And this year from 17 to 28. It’s our big growth year.

With the technology we’ve got and customers put together, if this were three or four years ago, we would be a 150-person company by now. We would be further from break-even than we are right now, with many more people, a wider product line and several strategic initiatives with money pouring in to fuel it, but we built one business that is almost break-even. And now we see how we can replicate it along different product lines.

Having lived in both markets, I would actually pick this one. Hands down.

Q: Aren’t there downsides to this market? Are you even getting paid?

Verschueren: I haven’t been paid for two months, but the thing that keeps me awake at night is that we have a really neat technology and some patents pending, but we are growing really slow. My only hope is that there isn’t a competitor that we don’t know about sneaking up behind us. That, to me, is the balancing act between how much dilution and how much money you want to take.

Noble: That’s exactly the point I’m at right now. We are starting to see one or two (companies) across the country being funded in this space. Now we are saying, ‘We’ve got the clear lead, we’ve got customers and product, and they don’t.’ But one of them took $13 million in May. (Our) clear lead might evaporate in another nine months.

Verschueren: There’s no magic formula.

Parker: And it will still keep you up at night.

Q: What were some of the other things you struggled with? Could you pay your employees this year?

Verschueren: The last $15,000 I raised was as time-consuming as the last million I raised before that. The $15,000 I’m trying to raise now, I’ve spent seven weeks on, with an attorney and everything. A couple thousand dollars used to be a phone call, and then you’d have a couple people fighting over who was going to write the first check.

This has literally taken six weeks. I might get the money wired tomorrow. I haven’t been able to pay employees. I had to lay them off. And this is money that would hopefully restart the company, but it is very painful. We’ve had to give up a lot in terms of equity and other concessions to get this money.

Pacquing: We took a creative approach. … The original founders decided to dilute among the team instead of externally. We were aggressive in giving the 20-person team a significant stake in company. And that allowed us some time to raise money to pay salaries. Yes, we are paying them now. Everyone is not at bubble salaries, however.

Noble: On average, we pay 30 percent less.

Pacquing: It’s closer to 40 or 50 percent less for us. People are willing to accept that.

Q: Do all of you have a lot on the line? What?

Verschueren: I think all of us at one point have had our houses on the line. I have in two of my companies. And personal guarantees.

Parker: Lots of personal guarantees.

Noble: I’m on for the lease in this place.

Pacquing: I just signed one this morning.

Verschueren: I just signed one (a personal guarantee) last week, which I swore I’d never do again, but I needed some legal work done, and the only way to get this one firm to do it is if I signed one. If I can’t raise the money through my company to pay for it, I’m going to be paying for it myself. It’s one of those entrepreneurial decisions. If I don’t do this, I might as well throw my chips in and go home.

Parker: I can always get a job.

Noble: That’s right.

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About the panel

Joe Verschueren

Title: CEO of SimulRing, based in Seattle, before it closed in November.

Background: Founder and current chairman of ImageX, a public company in Kirkland.

About SimulRing: Developed technology that linked together a person’s various phones under one number.

Funding situation: Looking for a seed round to revive SimulRing’s core technology. Spent seven weeks recently trying to raise $15,000.

Chris Noble

Title: CEO of Singlestep Technologies, based in Seattle.

Background: Worked at TechWave, now called Network Commerce. As part of the management team, helped raise more than $200 million before company went public.

About Singlestep: Technology helps companies manage network operations.

Funding situation: Raised $4 million in a first round. Looking again in April or May, when the company expects to break even.

Freddy Pacquing

Title: CEO of Ascentry Technologies, based in Tacoma.

Background: Left military in 1997 to work at various startups.

About Ascentry: Creates mobile security networks with wireless devices.

Funding situation: Currently looking. Has more revenue than it does investments (less than $500,000, including some loans and convertible debt).

David Parker

Title: CEO of Para3, based in Kirkland.

Background: After raising three rounds of funding for LicenseOnline, a company he founded, he sold it in May as part of a Chapter 11 bankruptcy liquidation.

About Para3: Focuses on information-technology security using technology from overseas. Operating "in stealth mode."

Funding situation: Para3 is funded through a strategic partner.

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Tricia Duryee: (206) 464-3283 or [email protected].

Copyright © 2002 The Seattle Times Company

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