VCs to Demo: Funding tough but not impossible

PALM DESERT, Calif.--On the day that the Dow sank below 7,000 for the first time since 1997, a panel of venture capitalists told attendees at Demo 2009 what most people already know. This is an extremely challenging environment for raising money.

But challenging doesn't mean impossible. There are still some opportunities for both entrepreneurs and investors.

The panel, which was moderated by Matt Marshall of VentureBeat consisted of Christine Herron of First Round Capital, David Hornik of August Capital, Bryce T. Roberts of O'Reilly AlphaTech Ventures, and Eric Tilenius of Tilenius Investments.

Tilenius said that "this is the worst fund-raising environment we've ever seen. It's incredibly hard to raise money." His company is doing about half as many deals as last year, with a 67 percent drop in funds invested. But even that figure, he said, doesn't tell the whole story. Much of the funds spent were on companies that had already received one or more rounds of financing. Financing of new companies, he said, "has dropped precipitously."

Christine Herron, whose firm invests seed money fairly early on in a company's development, says that, for her, the biggest difference in today's climate is "taking a look at how long someone's runway is." Seed investors used to be able to assume that someone would be ready to provide "just in time" financing when a funded company needed additional capital, but that's typically no longer the case. "Now people are looking for more evidence, which means more runway and larger seed rounds." In other words, investors at the early stages have to come in with more--not less--money to give start-up companies more time to get their businesses humming. She said that seed rounds used to be in the range of $300,000 to $500,000 and now are usually more than a million dollars.

Ironically, the stock market drop makes Tilenius optimistic. "Now we can go back to the basics in terms of how companies are formed." He pointed out that some of the best companies, including Apple and Intuit, are ones that received very small amounts of initial financing. When asked whether he had invested lately, he said he hadn't because he "hasn't seen entrepreneurs make the mindset shift." He's looking for start-ups that have a realistic picture of how they can build a real business on the money they are able to raise.

To a certain extent, said David Hornik of August Capital, "what is happening now is good for overall technology and venture communities but only those who survive." The efficiency required by investors that have less money to put into companies "is going to be good for the economy, but there will be casualties along the way." And it will take a lot less time, he said, for weak companies to fail. "Lemons ripen early" and companies that aren't destined to succeed "will fail more quickly in this economy," he said.

And speaking of lemons, Bryce Roberts of O'Reilly AlphaTech Ventures is trying to make lemonade. He thinks this is "an exciting opportunity" and that "the current time will show how adventuresome, crazy, and off your rocker you have to be" to be an investor today.