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Mix-Ansicht- Venture funding slows to near standstill - marsch, 25.09.2001, 20:52
Venture funding slows to near standstill
Venture funding slows to near standstill
Valley VC firms, start-ups say deals may be delayed up to three months
BY MATT MARSHALL
Mercury News
Silicon Valley's start-up machine was already running out of gas before the terrorist attack unfolded two weeks ago.
Then the tragedy dealt another blow, slowing crucial fundraising by Bay Area venture capitalists and the entrepreneurs who are starving for cash.
Some Bay Area venture capitalists fear the flow of investment money has been postponed by as much as three months. Some deals are still trickling in, but many others have been held up. In the meantime, the economy has entered the doldrums. Venture capitalists are forcing their start-ups -- suffering from canceled contracts and slower growth -- into hibernation.
Only start-ups that hunker down like a bear climbing into a cave for six months will make it: ``They have a big meal, their metabolism goes low, and they lay low to survive the winter,'' says Bart Schachter, founding partner of San Francisco's Blueprint Ventures, a young venture firm. ``We're investing in bears.''
Schachter, was putting the finishing touches on a new venture fund when the attack happened. His meetings in New York have been called off, forcing him to push out an announcement of the fund until next year. He also had to call off several meetings with New York companies he wanted to invest in.
Worse, Schachter estimates the tragedy will lead to a million job cuts, as airlines, hotels and other companies in the hospitality and tourist industry slash employment. That, he says, is rippling over to the business of start-ups. ``There's no more question about a recession,'' he says.
The impact on young start-ups, and the newer VC funds that nurture them, may not be crippling in most cases. But the hardship will likely speed up the demise of those weren't meant to survive in the first place.
Artemis Ventures, a small, 2-year-old venture capital firm in Sausalito, was trying to raise money for its second fund, which it wants to invest in technology start-ups, by a December deadline.
Its first fund has done relatively well, compared with its peers, and Artemis has a good chance at survival. But Artemis too had to scrap multiple meetings with investors in New York, Washington and Philadelphia. Artemis' managing director, Christine Comaford Lynch, was meeting with GE Capital, in Midtown Manhattan, when the attack happened. The two sides quickly adjourned, and Lynch was stranded in New Jersey until she could fly home last week.
`Everyone's waiting'
Since then, she's been waiting to be called back. ``I think everyone's waiting for the dust to settle,'' she says.
Instead, Lynch is taking time to meet with the companies in her portfolio. The impact of the East Coast disaster first became clear Friday, during a meeting she has with the chief executive of one of her most promising start-ups: Taviz Technology, a Palo Alto e-commerce software company.
Until the attack happened, Taviz was on track to log 40 percent growth in its revenue for the quarter ending Sept. 30. It recently sealed an alliance with Microsoft, and Friday, Taviz' vice president of business development practiced pitching sessions with Lynch to illustrate how Taviz planned to attract business from Microsoft customers.
But after the attack, one Taviz client decided to put a $500,000 contract on hold, and another customer's chief information officer had a heart attack, forcing Taviz to close only part of that deal. Taviz Chief Executive Officer Cheryl Traverse gave a big sigh, and said, ``With this war, everything went wrong.''
Lynch, who sits across the table with her partner, Henry Wong, looked concerned: ``But that's half a million,'' she repeated, digesting the size of the lost contract.
Traverse reassures her that Taviz will still reach between 15 percent and 25 percent revenue growth for the quarter, and aims to break even by the first quarter of next year.
But there are other setbacks caused by the market's harsh slide last week. Traverse is looking for more venture funding, and 10 venture investors have expressed interest. Four venture firms are scheduled to make offers by next week. That's the good news.
But VCs are demanding harsher terms. At breakfast Friday, one investor told Traverse that his estimate of Taviz's value declined by 30 percent from his Thursday estimate. He pointed to the plummeting stock values of comparable public companies, like BEA Systems, SeeBeyond and Tibco.
Investors ask for more
The change makes it very expensive for Taviz to accept venture money: Venture firms will demand a bigger ownership stake in Taviz in return for their investment. And the negotiation process has slowed.
Artemis is typical of many of the new funds that proliferated during the Internet mania. It has spent most of its money for a first fund, and is struggling to raise a second fund. Yet Artemis is doing better than many.
Its return since the second quarter of 1999 was 10 percent, compared with a 7 percent average. It has secured $27 million in commitments and wants to raise a full $50 million by December. And the firm is hiring partners, too, at a time when many firms are letting go of partners.
Other firms have been forced to close their doors; others are shedding partners. CMGI's venture arm, @Ventures, recently confirmed that three general partners will leave the struggling firm.
Dixon Doll, partner at Doll Capital Management, was meeting with a visitor last week when an assistant wearing headphones interrupted with an urgent message -- a fourth investor had called, he explains, to cancel attendance at Doll's quarterly meeting.
They wanted to reschedule ``sometime between January and summer.''
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