Notebook: Confidence crisis at VC summit

5 min read

"If you have the magic feather, you can fly Dumbo!" So went Timothy Mouse's advice to his large, discouraged elephant friend. By the end of the Disney tale, Dumbo discovers he could fly all along, all he needed to do was believe in himself.

At Wednesday's Silicon Alley Venture Capital Summit in New York City, entrepreneurs were flying from conversation to conversation, trying to convince VCs they had the magic feather, while the sky continued to fall on the dot-com heavy Nasdaq.

But did they really believe? An air of forced bravado permeated the conference as speakers acknowledged the blind optimism it takes to get a business off the ground, while musing on the mistakes their over-optimism has caused in the past.

"These people are all terrified out here, as we are downtown," said Jack Roda, a financial consultant for Smith Barney Shearson, who was running back and forth to the conference while buying up what he hopes will be rock-bottom Lucent (NYSE: LU) stock for his clients.

"Quit Dreaming."

"Over 30 VCs talk about the billions they’ve already invested ... and what they plan to invest in next," went the summit's teaser.

The VCs didn't talk that much, judging from the presentation by Alan J. Patricof, Chairman, Patricof and Co., who summed up the conference's tone in a keynote address Wednesday.

Rather than giving the eager audience of entrepreneurs tips on the next killer business plan, Patricof's talk was a cautionary tale.

"We had a public VC market. Now that funding has gone away... If you're private, concentrate on raising money. April is gone, forget it ever happened. Quit dreaming," Patricof said, mirrored on two giant video screen for the hundreds of attendees packed into the room on folding chairs.

Patricof, who has worked as a venture capitalist for three decades, called the current environment unnatural. "I worked 14 years before I started my own business. Who would ever have heard of people leaving Harvard business school after one year to go to a start-up?"

He also acknowledged the VC industry's complicity: "You can't take a company public and disappear - on the other hand it's no fun to drown." He added that the VC industry, including incubators such as CMGI (Nasdaq: CMGI) and Internet Capital Group (Nasdaq: ICGE), is working on a different formula now, having recognized that a lot of companies went public immaturely.

"CMGI is turning into a consulting company, in Europe at least. I'm not sure what Idealab! and ICG are doing, but they should consider changing their model....I don't know how many more companies we should be incubating," he said.

"This is an insidious disease. A lot of people have started companies that have no right to," said Patricof, who added that he still sees a flood of copy-cat business models every day.

He said the slow-down in job-switching is evidence that the break-neck growth of technology companies is easing off. "The next fallout is going to be unemployed people. I'm sorry I can't be more upbeat."

But when moderator Jason McCabe Calacanis led Patricof into musing on what makes an entrepreneur, Patricof praised the indomitable entrepreneurial spirit. He defined an entrepreneur as "someone that's totally dogmatic right up until the point that they change their mind."

Parachuting in to Switzerland

"I have to be the ultimate optimist," said March Chadwick, a 31-year-old architect who is willing to drop his job if he can just get a vote of approval for his business plan.

Seejoeplay.com is Chadwick's plan to streamline the antiquated process by which high school athletes vie for college scholarships. He got the idea about one year ago, when his brother, one of a market of 6.5 million student athletes, had to make 20 duplicates of a video to send college recruiters. He's got all the things VC's told conference attendees they look for in a start-up: a solution for a market need, an original niche business, and a can't lose attitude.

But Chadwick hasn't even been able to get a word in with the VCs, much less a feather from the Golden Goose.

"Have you ever been to Switzerland? Nobody talks there, and that’s where all the money is," quipped Chadwick, emphasizing his point that many of VCs were tight-lipped.

"I finally got enough courage to approach and speak to (Patricof) after he said he thought distance learning was a market with tremendous potential -- I thought that was related to my company. But I just mentioned the market of high school and he said 'not interested,' Chadwick recounted. "But I don't think he really understood my market," Chadwick added, lamenting he didn't have enough time to go in-depth.

Mathew Thomas, a founder of whataboutu.com, a portal for college students, corroborated Chadwick's complaint about the fickle, buzz obsessed VC industry. A year ago, after his company got its first round of funding, he told VCs it could be profitable within a year, but they told him not to bother. He said VCs are also guilty of only looking at whether a company is in a hot sector, like wireless, rather than judging it on its business model.

But Chadwick isn't discouraged by the funeral march of dot-com deaths, or his inability to find funding at the conference. "I've heard a lot of good ideas, but they're not as good as mine."

"I found (the conference) to be very optimistic -- everyone still believes the Internet is a new medium, its still in its infancy -- people are optimistic about the future, but they don't neccesarily want to listen to new pitches."

Besides, Patricof did love his seejoeplay business card, Chadwick added. "I think what he liked about it was my take on the infancy of the Internet -- these are the first words you learn in school," he explained.

At this point, Chadwick doesn't know how much money he needs to get seejoeplay.com off the ground. He has a few other issues to determine, such as how scalable the business needs to be, what technology he will use, and what exactly his revenue model might be.

"I'm cognizant of working within budgets. But it will take some initial belief in us to determine what we need to do," he said.

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