If a mainstream media publication is covering something, you know it’s old news. But, it’s interesting nonetheless.
Cash scarcer for new technology firms, from LA Times. Some quotes and excerpts, then some commentary:
In recent months, some start-up technology companies have died or gone into comas after running out of money, a possible early sign that the resurgence in venture investment may be coming to an end.
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Now such companies are frequently given months, not years, to prove concepts, with wary venture capitalists pickier about where they invest.
(…)
“If you don’t show hockey-stick growth, you don’t make it in this market.”
(…)
Only one technology company had an initial public offering in the first quarter of this year, down from nine the same time last year, according to an April 1 report by the National Venture Capital Assn. The group also found a slide in mergers and acquisitions.
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Matt Dusig, who sold online survey operation GoZing for $30 million three years ago, needs $500,000 to keep his Encino company, File123, alive.
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But the volatile stock market has spooked many investors and made it more difficult for companies to find buyers or go public. “You can’t get an IPO out when there are a lot of investors sitting on the sidelines,” said Mark Heesen, president of the National Venture Capital Assn. Without exit opportunities, venture firms need to keep funding older firms at the expense of younger ones, he said.
(…)
Keith Teare, for instance, whose company, RealNames Corp., sold a stake to Microsoft and almost went public in 1999, thought he’d found more success with Palo Alto-based Edgeio, which syndicated classified ads to clients’ websites.
He launched the company in 2006 with $1.5 million and received an additional $3.5 million in September 2006. At the time, investors valued Edgeio at $18 million.
But when he knocked on doors for more money last August, Teare was surprised to discover that the well had almost run dry. Investors didn’t think Edgeio was worth $18 million anymore and offered him a total of $400,000
(…)
Matthew Gertner expected to get a second round of funding for his Britain-based file-sharing start-up, AllPeers, in November. It didn’t materialize, so he picked up work on the side while he looked for other investors or a buyer.
He decided to shut down the site at the end of March.
Starting a company is not easy, building one that can survive and thrive is nearly impossible. WatchMojo.com is now looking more and more like an actual business, but for the longest time, I swear people thought I had lost my mind and wasting my time, money and energy on an expensive hobby.
As an entrepreneur, I respect all of these men listed above, please remember that when I say the following.
After all, yes, success is about vision, ambition and execution, but it’s also about timing and luck. So I don’t think the lack of success thereof is a real reflection of the men but probably of the other variables.
However, a few things worth noting. The companies the LA Times is using as examples, namely
- a file hosting site
- a classifieds site
- a file sharing site
are a dime a dozen. There is nothing defensive or even unique about them. These are companies that were able to launch due to a) open source software and b) cheap hardware. They got funding, however, due to the false premise that more traffic equals more revenue. This myth has been proven false by the rejection of UGC as a viable canvas to market to by advertisers. This is what I meant by why many VC-funded projects fail.
Some of them had gotten initial funding on the backs of the founders’ previous success but the fact that they are on the verge of shutting down (or have been shut down) says more about that than anything else.
In fact, I’ll say this, if the VC climate has soured, it says more about their own mistakes of backing many me-too clone companies. But the flip side is that VC activity has not died down, they’re just more selective and look for substance of style.
One thing I have learned is that you should only start a company if:
1- Sustenance: You think you can finance it all the way to profitability.
2- Sustainability: You can break even without external funding.
When I started WatchMojo.com, based on my track record, I naively thought I’d be able to raise money extremely easily. I really under-estimated VCs aversion to funding content plays. Thankfully, I managed to pull off 1 and 2 happened without me even realizing it. Today, partially due to the overall macro climate, VCs are coming to us, which takes me to point 3 pertaining to VC money in general:
3- Superiority: Only consider VC funding if and when VCs come to you.
If you have to hit the streets to pitch your business to VCs, I think you will waste considerable time and money which will make you burn time in #1 and make it harder to complete your product or secure business (#2). For the record: I’m not saying “don’t email a VC” - you sort of have to, I am just saying “don’t waste your time chasing them”. Their only job in life is find places to invest that money… if they’re interested, they’ll be courting you.
BOTTOM LINE:
Building a business isn’t easy… but expecting VCs to help you build it is laughable. If investors actually wanted to build businesses, guess what, that’s what they would be doing… wake up and be realistic people!
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