L. Gregory Ballard just spent the better part of six months learning that when it comes to venture capital, things aren't what they used to be.
In fact, they're not even close. Venture capitalists no longer salivate over business ideas sketched out on the backs of envelopes or throw money at untested entrepreneurs. They have money to invest, and they still make deals, but--showing a tough new caution born of the recent slaughter of the dot-coms--they drive hard bargains with companies such as Ballard's San Francisco-based firm, MyFamily.com, which expects to close a seven-digit round of venture financing this week.
"We're a star in everybody's portfolio, and we have a sparkling future," said Ballard, the firm's chief executive. "But I've been working on this round of financing since January."
Originally a book publisher selling to people researching their ancestries, MyFamily.com made the transition to the Internet age in 1996. But unlike countless other dot-coms, it focused on a simple goal--generating revenue from its online customer subscribers.
That discipline helped Ballard do a big round of venture financing a year ago last March--$30 million from investors such as AT&T, CBS, Intel, Kodak, Compaq, Softbank, Merrill Lynch and the American Century mutual fund. Many of the same investors wanted in on the current round too, according to Ballard, but they had some concerns that illustrate just how hard it is these days to raise venture capital, even for companies with solid prospects such as MyFamily.com.
The source of their worry was the fact that in the months after last year's round of financing, MyFamily.com bought three companies, in the process acquiring many new shareholders owning millions of dollars of preferred stock in the target companies. Preferred stock being what it is, in the ordinary course of things any new investors in MyFamily.com would have to subordinate their interests to those of the preferred stockholders--not a pretty prospect for the likes of AT&T et al.
"They would be the last people to get money out," Ballard said, "and that was unacceptable to the investors and the management team as well--because we'd have to sell the company for $300 million to $400 million before anybody saw a return."
The solution? It took months of negotiating, but Ballard persuaded the preferred shareholders that if MyFamily.com was to get more financing, they must give up their preferred status.
