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VC Recession Over?
Entrepreneurs, venture capitalists engage in
old-fashioned game of matchmaking
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Business New Haven
6/10/2002
By: Lisa Micali
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Sleeping, dreaming, showering, walking, talking - they think about it constantly. It consumes them and every waking moment (and every person they run into).
They can't shut it off or shelve it: They're money-starved entrepreneurs - those crazed post-industrial evangelists fueled by challenge, change, growth and technological innovation. But, in an uncertain world where both capital and new ideas are highly fleeting, vision, brainpower and a super-powerful painkiller is what counts the most.
Take Elaine Price, president and CEO of Trumbull-based CYA Technologies Inc. She's blonde, petite and has more than 20 years in the software business. She's a smart woman with a storehouse of bright ideas. Not your average mythological garage-tinkering kind of guy, but one whose business vision carries beyond Trumbull, Connecticut to Frankfurt, Germany - Europe's center of international business and finance, recognized as the “Gateway to Europe” with its melting pot of cultures, languages and lifestyles.
In 1995, Price led Phoenix Systems Integration and its German counterpart, two system integration companies providing content-management solutions for International Fortune 1000 clients. She identified efficiency gaps in the way technology deals with the recovery of information in the content-storage management market.
Price did what few of us will ever do: She developed a software solution that addresses the need for cost-effective, 24/7, end-to-end, object-oriented storage solutions.
That invention spawned CYA Technologies Inc., adding another company to her already tech-laden portfolio.
CYA, one of the few repeat participants at the Crossroads venture fair that took place last month in New Haven, graduated from “Ignite” company status to “Quantum” at this year's fair. (An “Ignite” company is seeking its first round of professional financing of $1 million or more, while a “Quantum” firm has already received one round of professional financing of $1 million or more and/or has posted positive revenues and are profitable or close to profitability.)
The ninth annual fair, presented by the Connecticut Venture Group, helps venture capitalists hook up with budding entrepreneurs. With record-breaking attendance in 2002, the fair ushered CYA into the brutal new wave of conservative, bargain-hunting financing that is sweeping through the VC community following the bloodshed of the last 36 months.
But like many entrepreneurs, Price enjoys a good challenge - especially ones where the odds are in her favor.
“Last year, investors were bottom-feeders, looking to secure a good deal for themselves to make up for past mistakes,” she explains. “Because they want to make up for everything they've lost, negotiating a fair deal became extremely difficult. We're in a unique position in that we have a profitable invention - not just another 'great' product. But two years ago, we were lucky if one or two investors were interested in finding out more about us. Now, because we're a solid company, it's become like a feeding frenzy.”
CYA, which closed an arduous $6.8 million round last year, is still looking for an additional $2 million to fuel development of additional software, strengthen its strategic alliances and build its direct and channel sales force. It hopes for more funding this year to help the company double its size by year's end and expand its distribution network.
Attracting funding for a new venture, even one that is grounded-in-the-marketplace, is no balmy feat today - even if you develop the next big thing or are lucky enough to be located in prime VC neighborhoods. The market for new ideas never dries up, but if you have a painkiller application it's sure to get cash today, muses one high-profile VC.
Even so, “Investors still remain wary about making new investments,” says Peter Longo, managing director of investments at Connecticut Innovations Inc. (CII), the quasi-public organization that makes equity investments in entrepreneurial high technology companies.
That's normal enough considering the roller-coaster market the state and nation have recently experienced. After all, the market for initial public offerings is sputtering along at a snail's pace, and venture capitalists have been scaling back activities as their prospects for IPO payoffs vanish.
“Once the markets gain momentum,” Longo says, “we'll see a turnaround.”
For their part, entrepreneurs remain skeptical.
“VCs are still very concerned and afraid of making investments and unfortunately, it makes them very short-sited in their willingness to pull together fair deals,” adds Price. “When you have a good solid company [VCs] are all over you. Everyone's interested, but once you get down to the end of the road in this market, you never know what the deals are going to look like. That's why the funding process is taking so long.”
What is getting funded, another VC adds, are ideas that are “a documented pain remedy - not value-added, vitamin-injection, cool-to-have technologies.” And as evidenced by the roster of firms at Crossroads this year, most participating companies touted some sort of “pain remedy,” and not a value-add, nice-to-have solution.
Take for instance, New Haven-based C Within Inc., a young start-up that uses a proprietary technology to provide electronic security services to large commercial and institutional clients, including the U.S. government. Founded in 2000, the firm has created a system that allows visual information to be captured over the Internet and transmitted to other concerned parties such as police, fire, EMTs, HazMat units and other security personnel.
“I use the Columbine High School tragedy as a case study for our product,” says Bruce Foodman, C Within's president and CEO. “It provides a dramatic illustration of our capabilities in critical incident management.”
Seeing a gap in the market, Foodman, a veteran security industry executive, recognized a huge loophole in wide-area security systems after someone broke into his home with his daughter and babysitter inside. He didn't have an alarm system but immediately started looking into systems and thinking about what features were most useful.
“Alarm systems lack real-time response because of the enormous number of false alarms,” explains Foodman. “Police and fire agencies take a fairly long time to respond because of the false-alarm problem and generally assume that if an alarm goes off, it's not real because there's not a whole lot of information that gets transmitted with a conventional alarm system.”
So he had an idea: “If we had an alarm system that had cameras tied to it when it got triggered it would allow someone to verify what was happening at the location,” he says. “Therefore, the police would be armed with more information and be able to know if an emergency was real or not.”
While the environment for funding high-tech startups has changed dramatically in the past few years, so has the selection process.
Not long ago, any idea with a good management team could get funded. Now we're seeing market-demand business plans with solid execution strategies already active.
But even these emerging high-tech companies with “painkiller” written all over them are finding it difficult to get the loot in an environment that has turned into a gladiator fest.
“Right now, the funding atmosphere is so conservative,” observes Conor Mullett of the Red Bank, N.J.-based Updata Capital, “that unless you have Nobel Prize technology or are backed by a serial entrepreneur who had built a multibillion-dollar company before and have $5 million to $10 million of revenue already, it's going to be a very long road to funding.”
Foodman couldn't agree more. “It's very, very, very difficult to get money right now,” he says. “Valuations are very low.”
Nevertheless, Foodman remains optimistic.
“We're very confident. We've gotten a lot of interest in our company post-9/11, and we're in an enviable spot in terms of being in a market space that is attractive to investors right now.”
Based on those comments you'd think it'd be a difficult time for entrepreneurs to launch new ventures but, at Crossroads, it certainly seemed that competent entrepreneurs didn't have any trouble interesting VCs - and vice-versa.
Another on-the-make firm, the bioscience company Taensa Inc., a German firm founded in Fairfield in 1998, announced at the fair that it would begin testing a new chemical compound designed to combat the spread of Lyme disease with the Connecticut Agricultural Experiment Station.
Taensa CEO Edgar Butts says his company is backed already by Winchester Capital Partners in New Haven will also get additional funding soon and may relocate to the Elm City.
Likewise, CEO Rudy Nadilo of Fairfield-based vSimplify, another serial entrepreneur, anticipates a smooth funding round. VSimplify offers a software program to insurance brokers and financial services companies that allows them to increase revenues and product exposure by distributing information to customer desktops.
“We get paid an installation fee to put in the product,” he explains. “This has been our winning formula that has turned around our acceptance in the marketplace.”
vSimpify has more than two dozen clients and approximately 60 brokers selling its product. “We sell to them and they sell to many,” Nadilo adds. “That's the strategy. We don't have to go direct, and in seven short months it's working.”
A similar outlook was echoed from the booth of College Park, Md.-based LifeTime Pharmaceuticals. Says James Atland, the company's CFO: “We're in the courtship stage with several investors. But we're getting closer to marriage. It won't be long, I have that feeling.”
LifeTime Pharmaceuticals, which focuses on using non-toxic drugs to stimulate and modulate a patient's immune systems to fight incurable cancer and fatal viral infections, has raised more than $7 million in equity from angels, management and subcontractors.
Crossroads, CVG's annual venture forum, provides access to capital for entrepreneurs who may not have any personal ties to leverage in the venture capital community. Approximately 750 attendees walked through the doors of the Omni New Haven Hotel over the course of the two-day fair on May 14-15.
Emerging-growth companies ranged from IT, software, bioscience, pharmaceuticals, communications, e-commerce and Internet to health care, medical devices, nanotechnology and financial services.
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