CAPITAL—Investors Turn Into Skeptics As Firms Look for Funding

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It’s never easy for private companies to raise money, but seldom in recent years has it been so difficult.

Just ask Jim McGovern, chief executive of Internet Wire, a Los Angeles company that disseminates press releases on-line.

“It’s brutal out there,” he said.

For the past nine months, McGovern has pounded the venture-capital circuit, meeting with 65 firms as he attempted to raise cash. The recently completed deal brought $2 million and provides for another $1 million. “If you don’t have real near-term visibility to profits, you’re not going to get funded,” McGovern said.

Entrepreneurs have had to adapt to a new climate that’s turned their biggest cheerleaders VCs, angel investors and other funding sources into skeptics.

“Everybody is demanding a lot more because the models that we used in the last three or four years didn’t give companies enough money to get far enough down the line,” said John Morris, president of Tech Coast Angels-Los Angeles.

Nowadays, angel investors expect young companies to have customers before they come begging for cash. Tech Coast Angels, a seed-investment network spanning L.A., Orange and San Diego counties, has cut its activity by about 50 percent this year.

“The bar’s higher, and a lot of guys are saying, ‘I need to stay with my credit cards a little longer. Instead of working with my business plan, I need to work with my customer,’ ” said Morris, who also is a partner with GKM Ventures.


Self sufficiency

Jan Brzeski, a former Goldman Sachs banker, raised $7 million over several years for STV Streaming Media, a company he founded in 1994. STV brought $70 million in an April 2000 sale to Sonic Foundry.

Despite the earlier success, Brzeski didn’t seek outside funding for his new company, Neo Networks Inc., a provider of satellite TV services specializing in non-English programming. “We knew that it had to be something that we could bootstrap along,” said Brzeski, who is president.

The company is nearly self-sufficient, allowing Brzeski to spend more time in operations than fund-raising. “It’s more important to develop revenue streams,” he said.

Crown Peak Technology would have been out there raising money in headier times, admits Chief Executive Jim Howard. The content management firm, started in January, has received less than half a million dollars in seed money. The partners went without salaries for the first six months, until revenue from customers would support them. “What the venture groups need are companies that are looking for very high-speed success or failure,” Howard said.

He should know. Howard is an alumnus of W3 Design, an L.A. Web-design shop that sold out to what became MarchFirst, the now-bankrupt Web consultancy. Instead of pushing for all-out growth, Crown Peak has delayed building out a national sales force and entering international markets.

Outside of venture circles, some private companies are seeking greater flexibility with their commercial bankers. There too, frustration is evident.

“It’s hard right now,” said Greg Duncan, president of Dun Can Security Consultant Inc., a provider of security services to mostly government customers. Dun Can has seen its business increase 60-65 percent since Sept. 11, straining cash flow given the extra costs of hiring and training new staff. Dun Can’s bankers aren’t helping. “You have a lot of conservative banks out there that are operating out of formulas,” he said.

The formulas often require companies to pledge hard assets, such as inventories, in exchange for loans assets in short supply at a service-oriented company.


Banking options

Some companies, like YMLA Inc., have switched banks. United Commercial Bank of San Francisco pursued YMLA Chief Executive Larry Block for more than a year, offering the apparel manufacturer increased lines of credit and lower fees on letters of credit and other services. Block didn’t bite.

That changed when Block found out that the International Male catalog was being shopped by its owner, Hanover Co. Block asked his old bank to help finance a bid, and when they gave him the cold shoulder, he began talking to UCB. Nothing came of the offer for International Male, but Block ended up changing banks anyway.

Sylvia Loh, UCB senior vice president for commercial banking, said she’s tried to understand YMLA’s business strategy. The important thing, she said, is for a frank exchange of views. “Either I convince them or they convince me, or we meet somewhere in the middle,” she said.

There are some development-stage companies that get funded, but they’re exceptions. California Technology Ventures in Pasadena just closed a funding with San Diego-based Acculaser Inc., which is developing a treatment that helps manage pain in muscular-skeletal injuries. Alex Suh, managing director at California Technology Partners, submitted to trial treatments for his own carpal tunnel symptoms and was impressed. He thinks Acculaser prevented him from having surgery. “I was not a big believer in it when I was going through the process,” he said. “The fact that it worked for me, and the other due diligence the company became very interesting.”

Barring fortuitous coincidences, the options narrow for companies that need money. Some VCs are “marrying” portfolio companies with promising technologies. Other VCs are sharing risk by syndicating their funding pools. And some private-equity players are insisting on debt rather than equity. In the end, there are companies that must simply face the facts and call it quits.

One local company, ValuMedia, the owner of a patented technology to print ads on plastic grocery bags, had signed contracts with customers, a well-respected board and a strong executive team. It needed $5 million to bridge the gap to profitability. Three investors were interested, but in the end, all three dropped out, said John Kirkland, a partner with Greenberg Traurig LLP in Santa Monica. ValuMedia plans to file for bankruptcy, he said. “Money is very hard to come by.”

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