Working overtime for venture capital funding
Treb Ryan managed to sell a start-up for big bucks just as the dot-com boom was ending. But now, just getting funding for his current company is proving hard work.
Editor's note: This is part of a series of stories about the recession's effect on the tech industry.
Entrepreneur Treb Ryan remembers in vivid detail the day the Dow Jones Industrial Average plummeted nearly 700 points and dropped below 9,000 for the first time in years.
He was visiting a major computer maker on that day, October 9, waiting to meet with a potential investor about funding his start-up OpSource.
"I was about a half an hour early for the appointment and was sitting in the lobby, where they have a big screen TV," recalled Ryan. "Within the 30 minutes I was there, the Dow had dropped 300 points."
Ryan, OpSource's founder and CEO, still had his meeting with the prospective investor, but the discussion was initially dominated by talk of the market malaise. And two months later, the parties are still in discussions about funding his software as a service (SaaS) company.
For Ryan, the market meltdown and recession have made the task of securing a new round of venture funding far more difficult than OpSource's previous four rounds. To date, OpSource has raised a total of $45 million from investors. And the 41-year-old entrepreneur is currently seeking to raise a $20 million fifth round of funding for his Santa Clara, Calif., company.
Nonetheless, Ryan exudes optimism. "OpSource is not going away. SaaS is not going away. I know OpSource will survive and I look forward to the day when the markets pick up...I believe we will come out of this. I'm an optimist. That's why I'm an entrepreneur."
Ryan has reason to be optimistic. He's had some lucky breaks as an entrepreneur. In 1999, Ryan founded SiteSmith, a provider of managed Internet services. A year later, he sold it for $1.4 billion to Metromedia Fiber Network. It was one of the last billion-dollar mergers of the dot-com boom.
OpSource, by comparison, is nearly seven years old. The company, which Ryan notes has had interest from prospective buyers, is a SaaS company that manages virtually all aspects of running and hosting businesses online. OpSource has 200 customers, of which 40 percent are traditional companies, such as Adobe, that are doing some SaaS with their business. The bulk, about 60 percent, are dedicated SaaS companies, such as on-demand human resources company Taleo, that are using OpSource to provide the virtual behind-the-scenes plumbing.
Ryan isn't the only entrepreneur working overtime to land more funding. In the third quarter, venture funding of U.S.-backed companies fell 20 percent to $2.73 billion over the same time last year and dropped to levels not seen since late 2006, according to Dow Jones VentureSource.
"Back in April 2007, we thought the public markets would be more open a year from now and we would be able to do an IPO," Ryan recalled. "But by this summer, with the market at 11,000, it was clear we wouldn't be able to do an IPO until the end of 2009. And now we're thinking maybe 2010."
As a result, Ryan said a decision was made to seek a late-stage funding round, with the goal of including strategic investors, as well. Meanwhile, the initial summer plans to raise a $25 million to $30 million round were scaled back in September to $20 million. Making it trickier: venture capitalists are placing much lower valuations on companies that are returning for additional funding.
"Valuations have been cut in half from where we expected in the summertime," Ryan said. "And that's pretty consistent with what we're seeing in the public markets (with where stocks are trading for public companies)."
With venture funding looking tight, OpSource has tightened its belt, as well. OpSource employs less than 200 employees, of which about 25 percent are in India. While OpSource has not had layoffs, it has reduced spending on sales and marketing.
OpSource has also gone back to its vendors and had success getting them to agree to lower their contract terms by double digits, but it came at the price of offering to extend the length of the contract.
Ryan has also applied some of this belt-tightening to his personal life. When Apple's new MacBook Pro debuted this fall, Ryan was tempted to snatch up the new laptop. But the CEO instead opted to install the latest Mac OS X version onto his old MacBook and squeeze another year of use out of the computer.
"I told everyone that if I have to do this at home, we can do this at work," Ryan joked. The married father of three added he's also sleeping easier at nights, now that OpSource began generating cash this month.
"Companies that stick to their knitting," he said, "are the companies that will stick around."
Coming up Friday: When times get tough, drop the satellite TV