What Is Being Financed Today?

Reprinted from Software Business Magazine
September 2000

The technology world was turned on its ear last spring with the wholesale devaluation of dotcom companies, 50-80 percent in some cases, and to lesser extent the broader NASDAQ market. Nearly every early stage e-tailer has folded or merged. Only the largest remain. Many of them (who are still private) are not financing with “down” rounds (below the previous level), but with zero rounds -virtually wiping out all previous investors. The market has shifted from B2C to Internet software, ASPs, high-speed Internet infrastructure and communications equipment. Except infrastructure, these opportunities represent quicker paths to profitability

While VC investing in the second quarter doubled over the same quarter last year, it is slightly down from the previous quarter — for the first time in many years. Still, $25 billion into 1,627 companies is a lot of money chasing deals. The difference is these companies typically have revenues, a customer base and demonstrated proof of concept. Internet-related investments drew 81% of the money; Northern California and the Northeast took 57%, but the Southeast and Midwest are growing rapidly at 120% each (Source: Venture Economics).

And it’s not just traditional VCs doing the funding. A number of mutual funds, who traditionally only invest in public companies, appear to have loosened up a few hundred million dollars for private investment. Recently, The Amerindo Fund and The Munder Net Fund have participated in private rounds. Private rounds are also being funded by insurance companies, pension funds, corporations taking strategic minority investments and, of course, angel investors.

Overall valuations on private enterprises have come down. Before the April crash, I saw a nine-month-old, high-speed Internet access company with almost no revenue and 22 employees value themselves at $80 million pre-money. Now, a 2-year-old company in the same field with $1 million in revenue and operations in six markets is valued at $30 million. That is still pretty high and handsome for a new business – but that is Internet access/infra-structure. Typically, businesses with more reasonable valuations of $8-10 million get funded faster. The starting point for new businesses with no revenue (an idea and the person who thought of it) is $2-4 million pre-money or 2x-4x hard money invested. When you add to it a management team with deep and relevant experience, that can easily triple to $10 million. If you have a blue-chip CEO and a blue-chip board, it goes to $40 million.

To find out who is investing in what, take a look at the following sites. Most of them are free “push” news services or otherwise easily accessible on the Web:

www.vfinance.com
www.dbusiness.com
Technological Partners Venturewire
 www.webmasters.com

Consumer businesses on the Internet will come back, but not until the underlying infrastructure and more readily profitable businesses are up and running. The biggest play in the consumer space right now is video and audio streaming. These include “controllable” alternatives to Napster and new twists on Real Network’s Real Player. VCs and large media companies are financing them. One upstart is databasing every video URL in the world to become the “super search engine” of video on the net.

To the extent that ASPs are hot, I would hope all of you by now have Internet-enabled your applications in order to sell them as a service. Even if you don’t have the channel for this kind of sale, there is a whole group of new ASP service companies being formed (like jamcracker.com) whose only business is to provide the SME market with a variety of standard business applications. These applications are licensed from publishers like you. Good luck with your efforts.

Insight From Robert Gettinger D E A LS Reprinted from September 2000 issue of Software Business Magazine © Webcom Communications Corp., 7355 E. Orchard Road, Suite 100, Greenwood Village, CO 80111, U.S.A, Phone 720-528-3770