Where's the money?

Entrepreneurs got some answers Thursday from investment bankers and institutional investors during the AlwaysOn Venture Summit in Half Moon Bay, Calif.

For starters, companies looking to cash in via an IPO, or acquisition, are finding that it's usually through the acquisition route, said Paul Deninger, vice chairman of Jefferies & Co.

Over the past five years, mergers and acquisitions have provided 80 to 90 percent of all equity returned to investors of venture-backed technology companies, compared with 30 to 40 percent in the early 1990s, he noted.

And that trend concerns Deninger, who compared the situation to venture capitalists "eating their young."

"The venture (capital) industry is headed into a wall. All the best companies are being sold," Deninger said. "For seven straight years, the number of companies going public has declined. That means the number of (prospective) buyers is also declining. Eventually, the VCs will have fewer companies that they can sell their companies to."

Companies that are hot IPO material and have breakthrough technology are likely to see Glen Kacher, Integral Capital Partners managing director, in attack mode.

"The deals we are most excited about are deals that will change the industry," Kacher said, noting he will aggressively pursue an investment in these companies prior to their IPO pricing.

Start-ups that fail to attract strong investor interest are not totally out of luck, institutional investors said. In fact, Paul Wick, managing director of J. & W. Seligman & Co., is one who will scope out "cold" IPOs, seeking to snap up the shares at a discount to the IPO pricing range.

That discount, at times, can be in the 10 to 15 percent range for investors in a "cold" IPO, said Leslie Pfrang, managing director of Deutsche Bank Securities. And in those situations, Pfrang will "lock arms" with a smaller core of investors, who Deutsche Bank Securities has a greater familiarity with, she said.

Pfrang, along with other panelists, offered some practical advice to entrepreneurs before they shoot off their mouths on a road show to attract investors.

"Our advice to management is keep your presentations short and let them ask you a lot of questions, be conservative on your models, and don't be overly promotional," Pfrang said. "Tell them about your potential and opportunity and don't disparage the competition."

Indeed. Trying to do a snow job on potential investors by claiming there are "no competitors" is likely to leave entrepreneurs with no money, panelists noted.

"The arrogance factor has got to go," Kacher said, noting he often hears from entrepreneurs that they have such a unique company that there are no competitors, but a quick look at the company's prospectus tells him otherwise.

And be prepared for the pointed questions during the road show, noted John Rende, portfolio manager with Weintraub Capital Management. One chief executive who was queried by Rende may have wished he had.

As part of his due diligence on the company, Rende learned through a simple Internet search that the chief executive was facing a massive lawsuit stemming from a marriage to spouse No. 5, while still married to spouse No. 4.

"Toward the end of the road show, I asked this person if the lawsuit would be a distraction for them," Rende recalled. "This person became defensive and the meeting ended at that point. I wanted to see how this person would respond to deep questioning. The wrong response is not shaking your hand when the meeting is over."