Better Business Management & Planning Practices

Attracting Venture Money In Tough Times
Abstracted from: Venture Funding Gets Less Venturesome

Financial Executive - March/April 2003, Pgs. 32-34

Loss leaders. No wonder the purse strings of many venture capitalists are drawn tight: although venture investing still boasts a 20-year record of 16.7% annualized returns, results for the past three years have been in the red for most VC firms. Steven Van Yoder observes that 2002, which saw a decline of 62% in new investments, was a watershed year for the industry. VC firms folded, and the moribund IPO market reduced opportunities for liquidity. Seed money is at a six-year low, falling from $8.1 billion in the second quarter of 2000 to an average of $1 billion in each of the first three quarters of 2002. Funding, when it occurs, has shifted dramatically to follow-on rounds of capital, and these are awarded primarily to companies that demonstrate they have achieved target milestones.

Hunt for follow-on funding. Yet all is not lost, the author advises. Companies can secure funding by following obvious though often difficult strategies. Capital is flowing to companies that have real products and generate revenues or that, lacking a revenue stream, have contracts with credit-worthy customers, generating future revenue streams. Strong client lists and realistic projections for positive cashflow within a reasonable time horizon also help. VC firms are looking more closely at company management, seeking depth and managers with proven expertise and experience. It helps if the experience is relevant and if managers demonstrate how they apply that experience. CFOs are in demand, especially those with sophisticated skills who can leverage scarce resources and provide creative solutions to operating problems. Venture firms are doing more due diligence and analyzing financial forecasts more thoroughly.

Terms are tougher. Securing funding has certainly become a much more arduous, drawn-out process. One company seeking second-round financing reported visiting 100 VC firms over a nine-month period before it found a match. Once funding is offered, the venture capitalists are placing more restrictions on portfolio companies, attempting to minimize future problems. No longer are parties sharing risk on an equal footing. Among the methods listed by the author to minimize risk are new debt instruments with additional security requirements and liquidity preferences in excess of the funding amount. A fortunate few are thriving in this climate of tight money. CYA Technologies, which produces software for data backup, disaster recovery, and business continuity, strengthened after an unsuccessful initial attempt to find venture funds. Despite scarce capital, it continued to thrive and returned to the venture market in 2002 with brand recognition for its products and an impressive list of bill-paying clients. After meeting with 26 venture companies, CYA chose one and closed the deal in under two weeks.

Abstracted from Financial Executive

published by Financial Executives International

200 Campus Drive, Suite 200, Florham Park, NJ 07932

Return to Library of Business Information

Get-the-Job-Done Right
and Save a Ton of Time or
we'll Credit-Your-Account!
Download and use any JIAN Business Planning Solution for up to 60 days and become convinced that it's what we say it is. If it's not, we will credit your account.

...