Startups play waiting game for next round

BY DAVID SPEAKMAN

A new study by research firm VentureOne of San Francisco shows not only is venture capital funding at a seven-year low, the length of time a startup has to wait between funding rounds has more than doubled in the past three years.

The over-funding of bad business models during the dot-com boom combined with a deadly-quiet initial public offering market has venture capitalists scrambling to keep from losing their investments.

VentureOne says of the 6,093 private venture-backed companies it knows of, only 1,482 received follow-on funding in 2002.

“The fact that there is a very large pool of private companies, the great majority of which did not raise follow-on financing last year while the median time between financing stretched to 19.5 months, presents significant challenges to both investors and entrepreneurs,” says Gil Forer, global leader of Ernst & Young’s venture capital advisory group in New York.

He says that although some of those private companies, such as Mountain View-based Google Inc., are already profitable, it’s important for startups to turn a profit or find a buyer before their VC money runs out.

Allan Thygesen, managing director at venture investor company The Carlyle Group in San Francisco says this affects thousands of companies born in the dot-com boom.

“Companies that were funded during the bubble that are still around, haven’t had an exit and haven’t been shut down yet, are
living on various kinds of life support from their existing investors,” Thygesen says. “I think that trend is continuing into this year but it is on the decline and I think it will work itself out over the next 12 to 18 months.”

Thygesen says that means the valley should expect a new string of bankruptcies and liquidations as well as M&A’s where venture firms sell — possibly at a loss.

“It’s not so much the deal activity has subsided, it’s more that the average price of those deals has come down dramatically. There are a number of well-financed private companies and public companies that are actively looking for deals at bargain-basement prices,” he says, explaining VCs are sometimes forced to swallow the bitter pill of a buyer’s market.

“Some return on investment is better than none,” Thygesen says.