Raising money from venture capital (VC) firms hasproven especially difficult for high-technologystartups in recent months.
But well-run companies that bring uniquevalue propositions to large markets have continued toacquire capital during the economic downturn.
“The companies that are getting funding today are top-quality companies,” National Venture CapitalAssociation (NVCA) vice president of businessdevelopment Jeanne Metzger told the E-Commerce Times.
“They have had to meet higher standards than thosecompanies that received financing during the boomperiod of the late 1990s,” Metzger said.
All told, investment rates have held steady at US$6 billion to$7 billion per quarter, similar to the boom times oflate 1998 and early 1999, the NVCA said.
Large markets that complement e-commerce products andservices already in place — including Web Services,electronic bill payment, supply chain collaborationand business intelligence — have attracted the mostcapital recently, according to financiers.
And analysts and entrepreneurs said today’s investors havebecome astute market-sizers after watching recentyears’ investments evaporate in undersized markets.
“Companies must show that their market is real andbig, not a niche market,” US Bancorp Piper Jaffrayanalyst Safa Rashtchy told the E-Commerce Times.
In January, Cambridge, Massachusetts-based Celarix closed a $17million funding round led by Austin Ventures. The companysuccessfully found funding largely because it serves the massive supply chain event management market.
An early entrant in a market valued at $1.1 billion byAMR Research, Celarix provides software and servicesthat rapidly disseminate data throughout the supplychain.
Similarly, ample market opportunity drewinvestors to electronic bill payment company Avolent.
“The electronic bill and invoice payment market hastremendous potential,” Avolent vice president ofmarketing Brian Valente told the E-Commerce Times.”U.S. companies spend $120 billion per year sendinginvoices to consumers and businesses.”
The San Francisco-based firm secured $40 million inNovember 2001 in a successful fifth financing round.
In addition to addressing sizable markets, would-befundraisers must demonstrate a unique valueproposition that offers significant improvements inproductivity and cost savings, analysts said.
“In the past, VCs were willing to throw money atbusiness models that simply took a traditionalbusiness and ‘Web-ified’ it, like Pets.com,”Morningstar.com analyst George Nichols told theE-Commerce Times.
“But investors are now looking for ventures thatchange the way business is done,” Nichols added.
A long-time backer of such change agents, Waltham,Massachusetts-based Charles River Ventures,participated in Celarix’s latest round.
“We look for big and unique ideas that serve a hugemarket,” Charles River spokesperson Meg O’Leary toldthe E-Commerce Times. “Celarix takes a unique approachto [supply chain automation] with a network-basedsolution.”
Indeed, Celarix executives — who have landed more than$75 million since the firm’s 1998 inception –attributed their ability to raise their most recentround in just 90 days to the soundness of theirbusiness model.
“You cannot blame investors if your business modeldoes not hold water,” Celarix CEO Jim Daniell told the E-Commerce Times.
Talkin’ ‘Bout a Revolution
Likewise, early-stage firm Netezza is tacklingthe multibillion-dollar business intelligence arenawith a patent-pending technology product that willbegin shipping in the second quarter 2002.
“Our business plan leverages partnerships withintegrators and independent software vendors that canhelp market Netezza’s solutions and open doorsquickly,” Netezza co-founder and CEO JitSaxena told the E-Commerce Times.
In March 2002, the Framingham, Massachusetts-basedcompany closed a BatteryVentures-led funding round worth $20 million, itssecond round overall.
“The value proposition must be significant,” NVCA’s Metzger said. “VCs are looking for technologies andcompanies that can potentially revolutionize thestatus quo.”
Follow the Leader
Venture capital firmslook for seasoned managers to lead their portfoliocompanies and execute business plans, analysts agreed.
“We look for startups to be run by an experienced –preferably serial — entrepreneur who has a trackrecord of success,” Charles River’s O’Leary said.
Led by Internet veteran DouglasThompson, Avolent’s management team wields deepindustry knowledge, which lured lead investorsConstellation Ventures and Rho Ventures.
“VCs are looking for strong market opportunity and acore product, but also a team that can exploit both ofthose opportunities,” Avolent chief financial officerStephen Ghiglieri told the E-Commerce Times.
For its part, Celarix boasts a management teamcomprised of 60 percent supply chain experts and 40percent software experts, Daniell said.
Show Me the Money
And a clear path to profitability is now a requisite for obtaining venture capital, according to analysts.
“We are seeing a reversion to historical norms, wheresuccessful businesses generally hit the IPO launchpadthree to eight years after starting up,” Morningstar’sNichols said. “VCs want to see a company generate cashin a similar time frame.”
Celarix’s Daniell and Avolent’s Ghiglieri said theirfirms will fit into this time frame if theirprofitability forecasts — for next quarter and next year,respectively — prove accurate.