Venture Capital Firms Shift Funding Priorities
August 28, 2000
Electronic Commerce News
(c) 2000 Phillips Business Information, Inc.
Infrastructure, Wireless and Healthcare Top List
Since the April stock market correction, many startup firms seeking
venture
capital have faced roadblocks in financing their ideas. Even well-
established Internet companies like Amazon [AMZN] are finding themselves
cash- strapped.
Kevin Jacques, a senior associate at the Sevin Rosen Funds, a venture
funder
in Dallas, says that many firms like his are too busy monitoring current
investments to fund untested e-commerce companies. "The unfortunate
thing
with a great [e-commerce] technology with no application...probably is
not
going to get funding," Jacques says. For example, two Dallas-area
e-commerce
firms, iChoose and eTopware, both of which are offering interesting
products, have recently faced this challenge, Jacques notes.
Mark Theilken, president and CEO of eTopware, which provides B-to-B
applications, says his company found venture funding in August after
trying
for several months. Theilken wouldn't say how many doors his firm
knocked on
before it got funding.
Theilken doesn't think that e-commerce funding is drying up, though.
Rather,
the challenge that e-commerce firms face in dealing with venture capital
funds is explaining their services in terms those funders understand.
Both Theilken and Jacques say that it's hard to exactly pinpoint what
types
of e-commerce firms are more likely to be funded. But Jacques says that
one
company his firm may be interested in wants to build the infrastructure
for
a collaborative exchange of goods and services.
In the past, many venture capital firms went overboard in funding
startup
companies that had flimsy business plans or were run by college dropouts
with little industry experience.
Now, venture capital firms are scrutinizing business plans, says Scott
McLoughlin, CEO and co-founder of The Adrenaline Group , a software firm
that offers technical services to fledgling Internet firms and companies
transitioning to the Web.
"To an extent that there is conservatism [in venture capital firms] they
are
going back to the way they should be. The venture capital and technology
industry is decades old. This did not start in 1997 with the Internet,"
McLoughlin adds. McLoughlin says firms need to prove their potential for
profit much more than they did in the past.
A few years ago, venture capital firms poured money into startups that
based
their success on using additional bandwidth without developing the
infrastructure to support it, says Jeanne Metzger, director of marketing
at
the National Venture Capital Association in Arlington, Va.
Venture capital outfits today are seeking startups that will build the
infrastructure for communications and business services, Metzger tells
us.
Examples of infrastructure that venture firms are interested in include
optical networks, fiber optics and products that increase Internet
bandwidth, say Metzger and Jacques of the Sevin Rosen Funds.
Has funding for electronic commerce initiatives completely dried up?
"Wireless is strong," adds Metzger, but "we have made an effort to
dissect
the Internet-related sector. We are referring to companies that are
building
the infrastructure."
For startups that wish to be competitive in seeking funding for
infrastructure ideas, several areas appear to be attractive to venture
capitalists. In general, health and data communications services have
drawn
significant interest, analysts say.
Since venture capitalists and aspiring entrepreneurs often are reluctant
to
discuss their ideas publicly before a deal is struck, it's not easy to
nail
down the best opportunities. However, one source noted that hospitals
and
other health services in the United States desperately need
infrastructure
to improve the efficiency of their operations.
Overall though, the outlook for venture capital appears very good. U.S.
venture capitalists put $24.6 billion into new companies this quarter
for a
total of $49.4 billion so far this year, according the National Venture
Capital Association.
That number compares with $58.4 billion for all of last year.
Regionally,
Silicon Valley still leads the country in investing, capturing 408 deals
worth $6.9 billion during the second quarter of this year, according to
a PriceWaterhouseCoopers study.
Selected Venture Capital Investments By Region
Region Q4 1999 Q1 2000 Q2 2000
Silicon Valley 366 393 408
New England 169 171 179
Midwest 92 105 102
DC/Metroplex 60 84 81
Texas 68 74 87
Source: PriceWaterhouseCoopers
Selected Venture Capital Investments By Industry
(In Millions of Dollars)
Industry Q4 1999 Q1 2000 Q2 2000
Software $2,192.90 $3,673 $4,706.30
Telecommunications $2,451 $2,943.70 $4,387.20
Business Services $2,523.40 $3,186 $3,706.20
New Media $1,517.50 $1,040.50 $1,416.90
Networking & Equipment $1,241.70 $1,052.90 $1,201.10
Source: PriceWaterhouseCoopers
(Kevin Jacques, Sevin Rosen Funds 972/702-1100; Mark, Theilken,
eTopware,
972/490-6700; Scott McLoughlin, The Adrenaline Group , 202/628-4438 or
877/890- 9280; Jeanne Metzger, National Venture Capital Asso-ciation,
703/524-2549.)
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