Fable is wrong. VC funds are bursting with ready cash--1,051 private companies raised some US$14.5 billion in venture capital in the first quarter of this year alone, and more than one-quarter of this went to startups.
What's the allure? The price of pie has gotten mighty sweet. The average entry for a startup deal rose to $19.2 million at the height of the dot-com insanity. Today it's closer to $10 million to $16 million. Even better, kids no longer call the shots. With Web firms closing doors everywhere and layoffs spreading across the economy, there's plenty of mature talent available.
Make no mistake, VCs are happy to spend (and spend big) on Web ventures today. But man oh man, the game has changed.
If you're coming back for round-two financing with no hope of profitability, your VC will let you fry. They'll pull the plug on anything iffy. They'll cheer the demise of a firm that fails to deliver.
And even when you secure financing, the terms are tough. VCs don't wrap up deals at cocktail parties any longer. On average, you should expect it to take six months to close on financing, from the first overture to a done deal. You'll also have to surrender a bigger stake, typically 20 to 40 percent, for the privilege.
In other words, the climate is harsh. VCs have had their bottoms blistered by the Web. They're not going to let it happen again.
But it's a myth that funds have soured on the Net altogether. Of the 236 first and seed financings in the most recent quarter, 148 are Net-related. Forget puppy-food peddlers and Web-dispatched errand boys. The glamour and the goo-goo optimism are gone. It's back to basics for funding today:
Tools that help consumers and businesses make better use of the Net itself are hot, hot, hot. Ecount, a next-generation online payment system, landed $11 million earlier this year. 4thpass, a developer of software that prevents hackers from stealing source code, collected $8 million in its first round of venture capital. And Peribit Networks, which is developing technology to improve network performance, got its first funding in January.
Everybody wants a piece of wireless. Even as the sector heads for a shakeout thanks to competing standards and clouds of hype, wireless equipment and services ventures grabbed $69 million in funding in the first quarter of this year.
New technologies are always on a VC's radar. While biotech is back in vogue, firms that offer innovations roll in easy dough (no matter how nerdy and glitz-free). Some examples: Progressive Photonics, a high-tech firm researching applications of radial graded lenses, and PetaLogic, a developer of semiconductor compounds.
Even highly selective conventional Web startups are getting backing. Pornography shows no signs of saturation. VCs hold their noses but open their wallets. Ditto gambling sites—already huge and poised to boom, thanks to the legitimizing air of major casinos, which come online this year. And even basic content sites are fetching attention. PocketThis, a startup working on Web content for wireless devices, received $10.5 million this year.
