Too venturesome?
Fast pace of financing deals has some investors worried
By Ronald Rosenberg, Globe Staff, 08/18/99
After one two-hour meeting in Silicon Valley, Highland Capital of Boston persuades a California venture firm to invest $5 million in eToys Inc., the on-line toy retailer.
Over breakfast, another venture capitalist hears an entrepreneur's investment pitch - and must make a decision after the second cup of coffee.
Almost overnight, NorthBridge Ventures of Waltham chooses to invest in Concord-based MyTeam.com, which provides on-line services to Little League teams.
By the end of the day, the deals are done.
This fast-moving landscape has rewritten how venture capitalists do business. Investment decisions that once took three months are now made in three weeks or less. A decade ago, a software start-up needed $10 million to $15 million to get off the ground. Today, an Internet company has no trouble raising the $70 million or more it typically needs, and launches an initial public offering within a year.
So bullish are venture capitalists that few can name any deal they regret making, insisting that as many as seven out of 10 Internet investments will succeed.
But other investors worry the gold rush of venture financing will take its toll.
''Are too many people doing too many deals with teams
not good enough to do the job? Absolutely,'' said Richard A. D'Amore, a partner at North Bridge Venture Partners in Waltham.
''Is there a day of reckoning? Absolutely. But people perceive a sea change with the Internet and they don't want to be left behind. So the price of this poker game has gone up.''
So hectic - and lucrative - is the scramble to fund Internet companies that venture capitalists are battling one another to get in early on the hot deals. Even some manufacturing companies - including Dell Computer - have created strategic investment subsidiaries to cash in on the Internet gold rush.
''Some people look at an eBay and an Amazon.com, see a lot of money around from successful initial public offerings, and decide they can launch venture capital companies to where at least one is formed almost every single week,'' said Daniel J. Nova, general partner at Highland Capital Partners.
Highland, which receives 75 to 100 Internet-related business plans per week, limits investments to 20 per year, said Nova. His firm also saw six companies in which it invested, including eToys and Ask Jeeves, launch successful initial public offerings in the first seven months of this year.
One of the firm's most recent investments is Boston-based Gamesville.com, which received $14.25 million in a first-round financing led by Highland. Operating under the slogan ''Wasting Your Time Since 1996,'' the on-line company offers free poker, bingo, and other games of chance - with prizes of cash, trips, and retail goods, according to its president, Steven Kane. Gamesville.com makes its money by running advertising between games.
Hefty financial returns on Wall Street follow a circular pattern that puts more money back into the hands of pension funds and other investment vehicles, part of which flows back to venture capitalists.
In this atmosphere, savvy entrepreneurs have figured out how to squeeze venture capital companies into making firm commitments quickly.
Raging Bull Inc. of Andover, which offers on-line investment resources to day traders and other investors, recently invited five firms to participate in its second round of financing. It gave them just two weeks to respond.
Two of those firms, CMG@Ventures, one of the largest Internet investors, and CNet, invested $20 million together. A third firm also wanted in but couldn't meet Raging Bull's two-week commitment requirement, said Stephen Killeen, president and chief executive of the 33-employee firm.
''In this environment, you, the company, stick to your guns,'' said Killeen, who declined to identify the third firm, since it may invest later on.
For some electronic commerce companies, as much as two-thirds of the total investment will be spent on marketing, promotion, and advertising to create a brand identity - areas once foreign to venture capitalists whose money went into research and development of software companies.
A decade ago, venture funding was in short supply, and entrepreneurs were mostly software and electrical engineers from such old giants as Data General Corp. and Computervision. They would spend money frugally, using it to hire technical talent and delaying marketing and promotion. These emerging firms pinched pennies until they sold their first products and reached profitability, then cashed in on Wall Street with initial public offerings, a process that took three to six years.
Today, venture capitalists may spend more than $60 million to launch an Internet start-up created by a young non-engineer, perhaps a recent grad with a liberal arts background who worked in marketing.
These on-line companies are often formed from clever ideas, with venture capitalists helping to assemble management and technical teams. Because these newer entrepreneurs are less experienced, some venture capitalists are playing a larger role in the day-to-day operations of the companies they fund.
To beat back competitors, venture capitalists use money as a club to scare other venture capitalists from investing in rivals. Revenue - not profit - is the key measurement of initial financial success, as young Internet companies strive to reach a wide audience.
Hefty sales growth enables some young Internet companies to launch initial public offerings to raise additional capital while venture capitalists and other investors watch for the stock to soar. EToys, which sells children's games, videos, books, and toys on line, launched its IPO in May for $20 a share, with the first trade at 75, before closing at 81. It has since fallen to the mid-30s, closing yesterday at 401/4.
Indications that Wall Street may not rush to embrace every Internet company surfaced last month as increasing numbers of similar on-line retailers of luxury goods, travel services, and general merchandise sprung up.
Oliver Curme, a general partner at Battery Ventures in Wellesley, recalls investing in the first on-line pet supplies emporium - California-based PetStore.com - only to see three similar pet ventures launched within 90 days.
''It's like a fraternity rush where everyone is trying to get picked and not be left out of the party,'' said Curme. He said the market for on-line consumer companies is maturing and the future is in selling products and services to businesses.
Battery Ventures recently invested in ecredit.com, a Westwood company that works with major banks and financial institutions to provide on-line credit services to small and medium-size businesses.
Still, he and other venture capitalists worry about a potential investor backlash from fast-growing Internet companies that fail to build solid management teams and turn profitable.
''I'm spending about 40 percent of my time recruiting people, because my biggest fear is not having enough talent, as we are starting to see real shortages in Boston and Silicon Valley,'' said Nova of Highland Capital.
This story ran on page F1 of the Boston Globe on 08/18/99.
© Copyright 1999 Globe Newspaper Company.
