A Toasty VC Climate
for Internet Entrepreneurs
E-Commerce Times - October 23, 2006
by Jennifer LeClaire
"We're just as interested in Internet
firms today as we were in the late 1990s," General Catalyst
Principal Neil Sequeira told the E-Commerce Times. "One of
the biggest differences between then and now is the cost of launching
a business today is more capital-efficient. It doesn't take as
much
money to launch today."
Internet start-ups seeking venture capital
support may be in luck, as a second coming of sorts seems to be
in full swing for Web-based technology firms, which enjoyed a
seemingly endless supply of cash during the dot-com boom of the
late 1990s.
In September alone, General Catalyst Partners
invested US$12 million in QuickPlay Media, Benchmark Capital sunk
$20 million into VoIP provider Rebtel Networks, and a trio of
VCs tossed $10 million at Nexaweb. Those are just a few of many,
similar deals.
In fact, VC investment in technology firms
has rebounded after declining for consecutive quarters in 2005,
according to Forrester Research, representing more than $365 million
in growth during the first half of 2006.
"There are certainly dollars going into Internet
start-ups again. The stigma from the turn of the century is no
longer there," attorney Todd Rumberger, managing shareholder of
the Silicon Valley office of Greenberg Traurig, told the E-Commerce
Times."VCs don't roll their eyes if you tell them you have an
advertising-based model because advertising is a viable means
of revenue today," he continued. "What they are looking for remains
the same: innovation."
Diverse Commerce
General Catalyst is proving Rumberger's point.
The Boston-based VC firm makes a practice of investing in entrepreneurs
who are building technology-based companies that will lead innovation
and transform industries. That's a tall order for an Internet-based
start-up looking for capital, but General Catalyst's most recent
investments offer hope to up-and-coming entrepreneurs.
General Catalyst saw ViTrue as a good bet.
ViTrue uses video infrastructure tools to create meaningful interactions
between brands and consumers. Consumers actually create messages
for the brands they are passionate about. It's a different twist
on social networking that landed the start-up $2.2 million in
funding.
General Catalyst's other recent Internet
investments include UPromise, a system to help families invest
in tax-advantaged college savings plans. Sallie Mae acquired the
company in June 2006. The firm also invested in Eons, a community
aimed at senior citizens that was launched by Monster.com founder
Jeff Taylor this summer, and JumpTap, a mobile search firm.
Seeking Capital Efficiency
"If you look back over the past five
years, we've been investing in consumer facing companies, online
media and e-commerce consistently," General Catalyst Principal
Neil Sequeira told the E-Commerce Times. "We're just as interested
in Internet firms today as we were in the late 1990s. One of the
biggest differences between then and now is the cost of launching
a business today is more capital-efficient. It doesn't take as
much money to launch today."
Sequeira points to open source software solutions
as one factor that lowers the VC's risk by
lowering the capital requirements. The Internet advertising market
has also matured, so unlike
e-commerce plays in the late '90s that hung their model on an
unstable online advertising-based
model, today's companies can show proof-points that cause VCs
to take a serious look a viable
business plans -- even with higher valuation deals.
Speaking of Advertising
Sequeira, for one, is closely watching the
growth of social media networks in light of the way
advertising has been delivered to consumers over the past decade.
Sequeira and his colleagues see a fundamental change in the online
advertising model occurring. Google (FINRAaq: GOOG) had its great
idea to monetize search seven years ago. VCs are now looking for
the next best bet.
"As online video and social networks
grow, there will be more advertising companies trying to monetize
these communities -- and it won't be through the traditional banner
and ad networks," Sequeira noted. "It will be new ways.
We're interested in those new ways."
Progress Partners is also looking for "new
ways." Progress Partners focuses all of its attention on
the e-commerce/Internet sector, which it now coins "new media."
The firm's mission is to source investors and acquirers for these
deals.
In the view of Frits Abell, the firm's managing
director, the current state of affairs feels reminiscent of the
late '90s -- a lot of entrepreneurs that are long on ideas, but
short on sound business models and strong management teams to
spearhead these ventures.
"We sift through the four or five companies
with which we meet weekly and work with those that can support
their projections, and clearly outline the 'solution' they provide
to a current 'problem' in the marketplace," Abell told the
E-Commerce Times.
Searching for Deals
Progress Partners is uniquely focused on
deals in the "new media" space, which includes interactive
advertising, Web 2.0, mobile phone advertising, word-of-mouth
marketing, and the like. That's both similar and different to
the types of deals the firm scouted for in 1999.
"The deals with which we engage differ
from those in 1999 in that we work with the entrepreneur to be
humble and realistic with his or her projections, clearly define
and strategize his or her unique competitive advantage, and ensure
that he or she hires the most talented, appropriate anagement
team," Abell noted.
Another significant difference relates to
investors, many of whom were burnt during the last Internet
frenzy. This time around, they are suspect of the "newest
hot deal" and require more realistic
projections on where the ventures will be in five years.
"Conversely, we meet with many entrepreneurs
who benchmark their path to success to that of Google or MySpace,"
Abell explained. "Clearly, they have not yet learned the
pricey lesson that for every Google there is carnage of thousands
of new ventures that never got off the ground."
Differentiation Key
At the end of the day, there are still far
more entrepreneurs vying for VC dollars than there are VC
dollars to invest. The biggest challenge for today's hopeful Internet
superstar start-up is differentiation -- rising above the noise,
according to Greenberg Traurig's Rumberger.
"It's still difficult to find the opportunity
to tell your story, but if you do it's got to be compelling,"
he
noted. "Investors aren't looking for slight improvements.
They are looking for something that is
completely different."
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