IQ News: Capital Crunch?

'Net Capital Is Still There, For Certain Companies. When PowerAgent suspended operations late last month, the company, which promised a new method for marketers to reach consumers on the Internet, did so after failing to raise a second round of financing. The shutdown came only weeks before the Menlo Park, Calif.-based firm was planning to launch its product into the Internet consumer marketplace. It had already burned through approximately $20 million in financing that came from a number of investors, including a strategic investment from data processing powerhouse EDS. With typical entrepreneurial spirit, the company's chief executive officer, Dale Sundby, expresses optimism that his company will find financing and be able to bring its product to market. But whether or not he succeeds, the story of PowerAgent is bound to fuel oft-voiced concerns among Internet media hopefuls that there isn't as much money around for new Internet companies looking to be the next SportsLine or Yahoo! "Two years ago venture capitalists were scrambling for a piece of the action in the Internet," says Richard Shaffer, editor of Venture Finance, a monthly magazine that covers technology VC deals. "Now they've sobered up a lot. We're seeing consolidations; some companies are going out of business because they couldn't get the second round of financing." Shaffer's words would seem to be a clear indication that all the talk on the street about scarce startup capital is true. However, what may actually be going on is that companies making Internet-related investments, be they venture capitalists or private investors, have become more savvy in where they invest. "Before, it was anyone for the taking," says Stephan Paternot, president of Web Genesis, which runs a large online community firm that received $20 million in a single private placement in August. "Any Internet kids could jump in the game." Despite its woes, PowerAgent did get one thing right according to the rules of today's more discerning investment marketplace: The company had a truly new service in an Internet media world filled to the rafters with "me too" push technologies and ad management software. But other problems, such as a missed delivery date on its software, have been enough to make finding additional financing tough. "Many times, an idea is worth more than a partial execution," explains one Silicon Valley veteran. Today's venture capitalists have plenty of money to throw around if they played in the initial rounds of the Internet financing-which of course, most did. According to a study released last month by Morgan Stanley Dean Witter, the 58 Internet-related IPOs that have taken place since the famed Netscape IPO in August 1995 have a net market capitalization of $9 billion. During the same period, shares of Microsoft are up by $123 billion and shares of America Online, which has seen its share price go through ups and downs, is $6 billion. However, what all that money may have done is make it more difficult for startups to get into a game that is becoming much more consolidated. Of the $9 billion raised from Internet IPOs in the past two years, some $8 billion of it is concentrated at only four companies: Netscape, search engine Yahoo!, Internet service provider Home, and online brokerage E*Trade. "Two and a half years ago, it was virgin territory and valuations were low," says Geoff Yang, partner at Institutional Venture Partners, an investor in Excite, MPlayer and GolfWeb. "Novel ideas in new categories were interesting. We didn't know what a business model might look like and what traffic patterns might look like." If those days are gone, technology investors are simply following a time-honored tradition: Invest in startups in an emerging technology category until a couple of clear winners emerge and then move onto the next big category. In the 1980s, personal computer companies and software concerns rode the crest of the VC wave. By the mid-1990s, the tide had turned again, to the Internet, which itself can be divided into several categories, including technology, such as Netscape, and media companies, such as Yahoo! With the Internet media market reaching relative maturity, venture capitalists are now looking for the next kind of Internet company. According to Mike Moritz, a partner at Sequoia Capital, the hot categories right now are infrastructure technology and "all sorts of things coming down the road with voice, video and data." "It's difficult to make investments at the application level on the Internet," says Moritz, whose company has funded Cisco Systems and Yahoo! "The cost of entry is enormous. You have to come up with a very different or special idea if you're going to carve out territory of your own." Does this mean that aspiring Internet media magnates should radically reconsider their chosen Internet niche? If the experience of Web Genesis is any guide, there is still money out there for companies with a lot of potential and a lot of patience. Paternot and chief executive officer Todd Krizelman had casually been talking to private investors about their online community site for months before landing the $20 million investment in August from Michael Egan, founder and chairman of Alamo Rent-a-Car. And that connection came without prodding from the president of Cornell University, who mentioned the startup to Egan because Paternot and Krizelman are alumni of the Ithaca, N.Y., university. "For an outsider who suddenly learns about these two Internet guys who raised all this money, it must sound like divine intervention," admits Paternot. However, the duo also says that they had carefully assessed both the venture capital markets and private placement, and decided on private placement because they found that private investors were more likely to have a long-term view of their business than IPO-minded venture capitalists. "VCs are harsh," says Venture Finance's Shaffer. "If you take their money and don't do what you say, you don't get anymore." Fortunately, more private resources are popping up. In Silicon Alley, the New York New Media Association has started a New York Angel Investors Program with about 30 private investors interested in high-tech startups. Monthly meetings are held for companies to present their business plans-and undergo exhaustive questioning-in hopes of securing an investment. Touched by an online angel?

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IQ News: Capital Crunch?

Anya Sacharow

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Anya Sacharow