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Lessons from Demo on surviving recession

The smaller size of Demo 09 doesn't mean the tech industry is going out of business. Rather, it suggests what companies need to do to get funding.

PALM DESERT, Calif.--How does one measure the effects of economic meltdown?

At Demo 09 here, there are two ways, one that's obvious, yet hard to see, and another that is both obvious and visceral.

While Demo for years has featured about 65 to 70 companies, this time around there's just 39. Everybody knows that, but it's hard to actually see it. The main ballroom where Demo presentations are held is packed, with every seat at every table full. But that's an illusion: the wall at the back of the room has been pulled in dramatically from a year ago when Demo 08 had several hundred more attendees.

And no wonder. The companies that present here pay well into five figures to do so, and most bring a group of people. The registration fee for non-presenting attendees is $3,000.

In the past, Demo has received hundreds of applicants for its coveted on-stage spots. While have complained that the show's format is pay-to-play, there's no doubt been an overabundance of companies willing to pony up for the chance at the exposure the show generally nets presenters.

This year, however, word is that Demo Director Chris Shipley and her team simply didn't have enough applicants that fit its criteria to fill out the normal-sized roster. Incidentally, Shipley recently announced she was handing off her leadership responsibilities to VentureBeat CEO and editor-in-chief Matt Marshall after this year's DemoFall.

Still, just because there are fewer companies presenting here this time around, doesn't necessarily mean the quality of those taking the stage was any lower than in previous go-rounds. In fact, it's always hard to accurately judge that quality until months later, since Demo is all about showcasing companies and products that are just getting off the ground. So, since it takes time build a business, the results are often not known for months.

Spotting likely success stories
To be sure, you can tell right away that some of the companies that present here are going to do well, or are going to fail. Sometimes their presentations just wow the audience, and sometimes you can feel the discomfort in the room. This is my sixth Demo and I'd have to say that the percentage of companies in those two categories this week feels about the same as it has in the past.

Indeed, my colleague Rafe Needleman and I nominated seven products as the best of Demo, and just one worst of. With just 39 companies on hand, that's a pretty healthy percentage.

"There's a suspension of disbelief that goes into start-ups...You have to have a certain suspension of disbelief if you're going to quit your job, anger your spouse, and work 14-hour days. You have to have a certain Pollyanna vision."
--Christine Herron,
First Round Capital

Last week, I wrote a story asking the question, do we still need Demo and conferences like it when the economy is falling apart and when companies have more choices than ever to promote themselves and their products. My conclusion? We do, but only some of them. As Eric Faurot, whose TechWeb company puts on the Web 2.0 conferences, put it, "In the event business, the stronger events, the really healthy events that have a real purpose to them, will emerge stronger, and weaker events will just die. They just won't survive."

After the last company finished its presentation here, I asked Christine Herron, a principal at San Francisco-based First Round Capital, what she thought of the event, especially given the smaller size.

Herron said that size really doesn't matter that much at Demo. What matters is companies' relative health and their funding situation.

"This year, there's a lot of companies who have made it here without a big check, so that's more interesting," Herron said. "If you're a venture capitalist coming to Demo looking for undiscovered investment (opportunities)...I'd like to see companies without a big check."

The lessons of Demo
She's talking of companies that can handle the five-figure presenter's fee, as well as Demo's criteria, without having taken significant investment from a VC. Herron seemed to be suggesting that this is a sign that even in this toxic economy, there are still a number of companies that have been able to get to the stage where they are qualified to present at Demo--including paying the fee--with very low costs. And that could well be a sign that companies, albeit a limited number of them, are seeing ways to weather the recession (or depression, if it gets that bad) by more quickly and efficiently getting products and services to market than has been the case in recent years.

If so, this is good news. It seems to me that this is the only model that is going to succeed in coming years. A panel here on Monday about venture capital in the post-downturn era pointed out the obvious reality that VC investment is down significantly. Eric Tilenius of Tilenius Investments said, for example, that his firm's investments are down 67 percent and that of those that are getting money, most are companies that have already gotten at least one round of funding. The number of new companies getting VC money, he said, "has dropped precipitously."

What does this all mean? Clearly, that the salad days are over. We all thought that after the dot-com bust, only companies with viable business models could get funded. In reality, I think we saw that the lessons learned in the tech industry really had more to do with the levels of funding VCs were willing to put into companies. In the 2003 to 2007 years, as the stock market rebounded and Google millionaires started impacting real estate values throughout the Bay Area, companies could still get funded. They just weren't getting $50 million just because they had a badly-spelled URL like in the pre-2000 days.

Now, companies are still going to be getting funded, but seemingly only if they really do have a solid business model, and likely only if they've already convinced previous investors to get involved. Venture capital is only going to flow to companies that have demonstrated they know how to get to profitability without spending a fortune and without needing to be propped up because they don't have any revenue.

In that regard, then, Demo looks like it could well be an interesting barometer of the state of the (technology) economy. Some companies will succeed. Many will fail. And those trying to make it are going to need to keep their eyes seriously on the prize, even as the grim reaper circles around.

"There's a suspension of disbelief that goes into start-ups," said Herron. "You have to have a certain suspension of disbelief if you're going to quit your job, anger your spouse, and work 14-hour days. You have to have a certain Pollyanna vision."