A year ago, venture capitalists were the rock stars of the New Economy, trafficking millions to startups they hoped would reap billions. Well, the party's over and the hotel room's trashed with dot-com wreckage.
Ask VCs today about investing in the latest dot-com startup, and they will echo George Bush Sr.'s famous line: "Wouldn't be prudent." The lesson learned from the investment mania of 2000 is that it's time to return to time-honored investment basics. Prudence is the way to go.
"Last year, if you were a startup claiming to offer a service that was faster, cheaper and the first to market, you had a model that many VC firms would throw money at," said Massoud Entekhabi, managing partner with Santa Monica-based TL Ventures.
The amount of venture money that was tossed to L.A. businesses climbed from less than $30 million in 1993 to almost $2 billion in the first nine months of 2000 alone. (Fourth-quarter figures are not available yet.)
Consider some of the dubious investments during the fourth quarter of 1999. Culver City-based CarsDirect.com, a site where you can buy cars and get financing information, got $280 million from firms such as Hambrecht & Quist, Goldman Sachs and others; the company recently dropped its IPO and announced layoffs. BizBuyer.com, a B2B marketplace that closed its doors last month, got $38.5 million from Redpoint Ventures and others. eStyle Inc., an operator of B2C-oriented sites, got $25 million from Zone Ventures, Vulcan Ventures and others.
Would companies like that get that kind of funding in today's marketplace? No way.
"The idea that a company can aggregate eyeballs and figure out how to monetize them later, which was popular in the (recent past), has gone away," Entekhabi said.
Instead of doling out checks to those startups and waiting for an IPO, VCs are returning to traditional, established practices.
"They're returning to the obvious and very successful fundamentals," said Rohit Shukla, CEO of the L.A. Regional Technology Alliance. "The fundamentals are simple and they've never changed: revenue, growth and profit."
"Private equity investors are more focused on investing in a business opportunity that has a sustainable, supportable, unfair advantage in the marketplace," Entekhabi said.
To meet those criteria, local VC firms will have to acknowledge that innovation is happening globally.
"Venture capitalism has always been local," Shukla said. "The truth of the matter is that, with their extraordinary funds, local VC firms need to find innovation wherever they can find it in the world and bring it into their portfolios."
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