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Start-ups find oasis in funding desert

While a number of tech upstarts struggle to find venture funding, a lucky few manage to raise rounds in excess of $100 million.

While a number of start-ups struggled to find venture funding in the first quarter, a few lucky tech companies managed to raise rounds in excess of $100 million.

That's quite a feat, considering that the median venture round raised in the first quarter was $9 million. And only eight companies out of 609 managed to snare $100 million or more in their latest round, according to research firm VentureOne.

Although the communications sector was hit with a surprising decline in the first quarter after a year of relative stability, five of the companies to enter the $100 million club were in the communications sector.

John Peters, who runs Sigma Networks--one of those five companies--and Jim Brailean, who heads PacketVideo, were among the entrepreneurs who found an oasis in the desert.

These entrepreneurs were able to weather a quarter that marked a fourth consecutive quarterly decline in funding levels and a drop in overall funding not seen since mid-1999. The secret to their success, in part, was in taking advantage of relationships to attract investors and scaling back their business plans in order to reach profitability with the money received.

"The feedback we got from (venture capitalists) was they wanted a fully funded plan. They didn't want to risk their capital on a company that was seeking a partial investment, because there was no guarantee it would get the next round to reach profitability," said Peters. "They wanted you to reach profitability with the money you raised."

Sigma, based in San Jose, Calif., raised $145 million in its first round and significantly increased its valuation over its $10 million seed round, Peters said. Few companies these days are able to raise additional funding without discounting the value of the company.

Although the company increased its valuation and raised a sizable first round, Sigma had to dramatically scale back its initial plans to reach profitability with just one round of outside funding.

"When we started Sigma in February (2000), funding was really easy to get, and we thought we'd raise a couple billion over a period of time. It was a strategy a lot of companies used then," Peters said. "But when we started to raise

Big guns
Despite a tight market for raising funds in the first quarter, 7 tech companies managed to raise $100 million or more in their latest rounds--placing them in the top 10 list for all industries.
Amount raised
$350 million
CityNet Telecommunications
$175 million
Sigma Networks
$145 million
Giantloop Networks
(Information services)
$120 million
Xtera Communications
$110 million
$100 million
$100 million

Source: VentureOne

funds in June, it was clear the markets weren't as friendly. And that's when we got the message that VCs wanted a fully funded plan."

Sigma cut its initial business plan to operating in five metro markets from upward of 40. The company sells a broadband-interconnectivity service in metropolitan areas that allows network providers and bandwidth purchasers to increase the selection of bandwidth for sale and cut the time needed to get it operational.

Sigma's investors included Frontenac, Benchmark Capital, Technology Crossover Ventures, Epoch Partners, Cisco Systems and Comdisco, and the company also got personal investments from Reed Hundt, former chairman of the Federal Communications Commission, and Marc Andreessen, co-founder of Netscape Communications. These investments were part of Sigma's $435 million equity and debt financing.

Peters noted that having Hunt, Andreessen and a Benchmark partner on their board helped Sigma raise funds.

"I leveraged our board of directors. It really helped to have these people introduce our company to prospective investors," Peters said. "It's really difficult to just cold-call investors."

The power of relationships
Brailean also believes in taking advantage of relationships to raise capital. PacketVideo, which develops software to deliver audio and video over wireless networks, relied heavily on its corporate investors when it began looking for capital last July.

"When you're working with a large company and they're building part of their next solution based on what you're doing, it's a win-win situation to ask them to be a strategic investor," Brailean said. "They understand you need funding to grow the company."

PacketVideo, which raised $100 million in its fifth round, received about 75 percent of its funding from corporate investors such as Motorola and Sun Microsystems.

The San Diego-based company was able to attract corporate investment at a time when this group of investors was pulling back dramatically. Corporate investment fell to $143 million in the first quarter, a sequential decline of more than 80 percent, according VentureOne.

"When we started raising this round last July, the market had gone through some pullback, but it wasn't as significant as what has happened this year," Brailean said. "We had to be on top of our relationships."

That meant a lot of red-eye flights to Chicago for Brailean, who frequently traveled to the region to meet with the company's lead investor, Motorola.

"Whenever communication is not flowing, people assume the worst," he noted. "My job was to make sure they got all the information they needed and got it immediately. It was a full-time job for me."

PacketVideo has raised a total of $142 million with its latest round. And the company increased its valuation by 50 percent from the previous round to $780 million.