The harsh realities of funding and finance
Exasperation and despair
On Thursday 15th February 2001, a London based organisation, NETPROZ (formed for the purpose of bringing e-business entrepreneurs together with funding organisations) held a special event. The event, called the Equity Food Chain, was part of a unique collaboration between six business networks based in London:NETPROZ, The National Business Angel Network, Netimperative, HRNet, Simplesite and Wave2. The idea was that members of these various communities could come along to the event to ask a panel questions relating to the funding of e-business startups.
It was a particularly apt time to hold this event because in the wake of the many recent dotcom failures, enthusiasm for investment in e-business ventures had fallen off dramatically. It wasn't hard to see why. Only the day before this meeting, an article had appeared in the London Evening Standard, by the city editor, Anthony Hilton, highlighting the problem.
The Nasdaq index of hi-tech stocks had fallen to half of the value it had reached at its peak in March 2,000. At the time of this market high, the average price to earnings ratio of the top 100 stocks had stood at an incredible 165. With stock prices falling to half their former values, it would have been expected that the price earnings ratio would have followed suit and fallen to around 82. Instead, the price to earnings ratio had risen to an unprecedented 811 due to the low earnings and the losses reported by these top 100 companies during the year. It was these kind of figures that were dampening the enthusiasm of even the most optimistic of investors, so, the-business startups looking for funding had every right to feel concerned
As one of the panel, I was sent a list of the questions that had been sent in for the panel to answer. These included the following:
What is the best way to secure seed capital to develop a concept for a technology startup?
We are a start up company developing a product that could revolutionise the way data is handled over multiple platforms. We have interest and a great deal of help and support from a major technology company. We are still looking for funding. When we first started approaching VCs we thought that our offering would be received with delight as it has the potential for fantastic growth and enormous financial return. We were hugely disappointed however to be frequently told, "Oh well, it hasn't been done before, we prefer tried and tested products".
They all seem so afraid of looking at something new, preferring either something conventional, a mild revolution by somebody who has already tried once and failed, or something being developed by a tribe of Microsoft employees! Even the angel investors we have spoken to say that they are only interested in investing in serial entrepreneurs. Bearing in mind we have secured technological (and later marketing) support from one of the biggest companies in the business, where can we find an investor who is prepared to put the venture back into capital or at least give us a proper look?
We are Entrepreneurs currently at funding stage and looking at Business Angel/ VC opportunities. Taking into account the recent reduction in value of Tec stocks, what factors need to be addressed/ altered (if any) when preparing a business plan for potential investors to review?
The investor market seems so scared of investing in Start Up technology companies and are demanding a level of development often impossible for companies looking for their first round of funding. With fewer start ups finding funding and fewer companies reaching maturity as a result, surely the pool of companies requiring funding for second round plus (which VCS seem to be looking for) will eventually dry up. Is it any wonder when investors show such lack of faith in the industry that stock market values fall and the general public lose faith in what should be an industry of tremendous growth. What can be done to break this cycle?
We all welcome a return to sensible valuations and the application of "normal" commercial logic, but let's not forget that venture capital is still about risk taking. That requires vision and leadership, as well as analysis and clever financial engineering. Does the panel agree that these qualities are now in short supply among the investor community and that the winners will be those with the guts to lead deals rather than follow "safe bets"?
We have huge confidence in our business proposition, and very ambitious about its world wide relevance. But we're humble enough to recognise that the world around us will change, and things just won't turn out the way the business plan says they will. How much thinking about this do your investors expect to see in a business plan?" What do the panel think are the critical success factors for funding bids going forward particularly in emerging areas such as content for mobile devices?
Are investors, on the whole, more risk averse today? Are there differences between the UK and US?
I am particularly interested in Corporate Venturing, and would like the panel to comment on their thoughts on whether there is evidence that Corporate Investors are increasingly willing to seed early stage businesses. As a follow-up I'd be interested to know if the panel agrees with me that the efficiency of this process can be greatly increased if Corporates work in parallel with VCS (Its our view that more Corporate money will free up if larger organisations can be reassured that there are good processes in place for deal evaluation, deal structuring, and ongoing support once the businesses have been funded.)
Given the change in the VC role for funding seed/ startups. What will fill this gap; if anything at all?
"The question I have and the problem we face is to recover our business (both on and off line) after funding 'fell through' at the last minute through no fault of our own. The business is still viable and potentially very profitable and dominant however we have a short term funding crisis to deal with and the prospect of starting the funding search again." Where are the investors who can look at a business opportunity as a 'real business' rather than talk in acronyms and look for the latest technology?'
Were all the VC's who appeared in the last couple of years really professionals or were they merely gamblers?
What are the 3 key elements investors look for in a business plan? In what ways have investors changed their approach to finding suitable startups over the last 6 months? Given that VCS are less likely to invest in unproven start ups, what is the best way to find appropriate angel investors? How critical to investors is having key staff in place, despite the problems in recruiting people to theoretical jobs?
With reference to the provinces and funding, business angel networks tend to be a waste of time. Members are old fuddy duddies, who like the prestige of attending meetings but with no intention of funding. What can be done to support entrepreneurs in the provinces?
I believe that current tech stock pessimism is the filpside to misplaced tech stock optimism: IT was set up for a fall, and now it's being dismissed prematurely. My main question for the panel is: 'How can businesses in the IT community convey their value in a realistic and convincing manner, so that investor expectations never have to be frustrated on such a scale again?