Venture capital getting sparse: Funding still available, but good luck getting it

Electronic News, Feb 25, 2002 by Tom Murphy, Ed Sperling

First the good news: Venture capital is still available. Now the bad news: It's tougher to get that funding, it takes longer and the amounts being doled out to start-ups are much smaller than two years ago.

In the wake of the dot-com meltdown and a prolonged economic slowdown, not to mention growing competition from other industries such as biotechnology, the venture funding landscape looks far different than it did in 2000. Long gone are the days when venture capitalists would call companies looking to make an investment.

"It's a lot harder to get money," said Steve Morris, CEO of Teseda Corp., a Portland, Ore.-based start-up that makes test equipment for system-on-a-chip devices. "There's a lot more due diligence. Our closing round of financing was about seven months from start to finish. Two years ago, that time was a lot shorter. People keep saying there's a lot of money available, but it's hard to extract. They're not investing in new stuff until they figure out what they're going to save in their current portfolios."

Two years ago, the venture capital market looked a lot like the explosive real estate market in the Bay Area. Prices were rising by the minute, and anyone who wanted to live and work in boom town had to compete with multiple bidders for a stake in the market. Now VCs are making strategic investments when they want to, instead of feeling the pressure to jump in before a fledgling company's IPO, said Kris Erikson of General Atlantic Partners. The firm now spends more time looking over the management team of a semiconductor prospect to ensure their core business values are in sync. If they aren't, the startup doesn't get funded.

"While the deal pace has slowed down, the overall quality of opportunities has gone up," said Sean Doyle, director of strategic investments for Intel Capital. "The deals are fewer in number and smaller in dollar value, but it gives us an opportunity to spread our dollars around more."

There is no shortage of companies looking for those dollars. At a time when many industry events are showing reduced attendance, the Semiconductor Venture Fair last week was packed. But the decision of when to invest in a start-up takes about four to six months longer than it did in 2000, Doyle said.

Venture capitalists also are taking a closer look at a company's end market, said David Tuckerman, venture partner at CMEA Ventures of San Francisco. It's not enough anymore that a large system house uses a particular company's chip for a line of communications equipment. If the chip is "deeply embedded" so that its branding is unknown outside the box, it is less likely to draw financing from CMEA Ventures. However, if the chip is so innovative and beneficial that other chip companies and system houses start designing new chips and platforms around it, CMEA is more likely to take an interest.

If a system house like Cisco can easily incorporate a new chip into an existing platform, it can just as easily chose another company's chip, and a company's customer base disappears just as soon as it formed. "The NPU company has to have a business model that develops market power," Tuckerman said. "It also has to have a lOX value proposition in something that a large number of people care about."

Venture fund managers also want to get involved in the early stages of funding, said Bruce Walicek, director of Global Investment Banking of Deutsche Banc Alex Brown LLC. Interest in funding companies at the mezzanine level has dried up. Venture capitalists also want to support those companies that have the best portfolio of customers, he added.