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For start-ups, heady times now a memory

Funders warn tech firms to cut spending as the financial funk spreads. Layoffs grow.

October 18, 2008|Alana Semuels | Times Staff Writer

Young technology companies across Southern California and Silicon Valley are scaling back growth plans or laying off employees to brace for a potential drought of venture capital funding as the global economic crisis spreads.

They have received warning from investors that there's less money to go around as tough conditions in the financial markets make it more difficult to cash in through acquisitions or initial public offerings. Already, investors pumped 7% less money into young companies during the third quarter than they did in the same period last year, according to a report released today by Dow Jones VentureSource.

Though there were a few rays of light during the quarter, particularly in renewable energy, most venture capitalists and start-ups say the travails of the last month have forced them to reevaluate their plans.

Frank Peters, chairman of Tech Coast Angels, a Southern California investing network, is advising companies to spend conservatively.

"The name of the game now is survival," he said.

Last week, storied venture capital fund Sequoia Capital, which backed such companies as Apple Inc., Cisco Systems Inc. and Google Inc., invited the heads of its portfolio companies to its Silicon Valley offices for a grim presentation. It began with a skull and crossbones on a tombstone and the words "R.I.P Good Times."

Slide 3 showed an animal carcass with a knife stuck in it. The firm advised entrepreneurs to control spending, reduce debt and lower risk.

Days later, Sequoia portfolio companies Jive Software and AdBrite each reportedly laid off dozens of employees. Start-ups Seesmic and Redfin are among other start-ups that have shed jobs recently.

Instructions similar to Sequoia's are being issued across the country.

"We had a meeting and said, 'Hey, going into next year and losing money and expecting we're going to write more checks is nonsense,' " said John Morris, managing director of Los Angeles-based GKM Ventures.

Zivity, a social networking website for adults that bills itself as Playboy meets "American Idol," recently cut eight of its 22 jobs. "The companies who are doing it now have a chance of surviving," said Cyan Banister, co-founder of the San Francisco start-up.

The Dow Jones VentureSource report indicates that the belt-tightening has begun. Money invested in Southern California companies fell 9.5% from the same period last year, while the number of deals fell 27%.

Nationally, the third quarter saw 7% less cash invested, with 13% fewer deals. Particularly hard hit was information technology, which saw the fewest financings since Dow Jones began tracking venture spending in 1997, the company said. The number of deals in the sector dropped 21%.

"While two months ago you could write a plan and raise a million bucks, everyone is holding back," said Steve Mock, chief executive of Giftventure .com, a Henderson, Nev., company that mails personalized treasure hunts to children. As the market began to go sour, Mock raised a small funding round, cut back on marketing expenses and implemented a hiring freeze.

Joseph Morin is trying to raise a second round of funding for his Irvine company, Storybids, which inserts product placements into online videos. He's already met with 15 potential investors and he thinks something will work out.

In the meantime, he said, "It's about how to weather the storm." He's cut back on advertising "as a precautionary measure," he said.

Although venture capitalists are typically more concerned with long-term profitability than quick turnarounds, things are going more slowly than usual. Entrepreneurs typically look to realize some of their start-ups' value through IPOs or by selling them to bigger companies. But there were no U.S. venture-backed initial public offerings in the second quarter this year. Mike Schoenfeld, leader of the venture capital advisory group at Ernst & Young, said there were only a few in the third quarter.

Still, investors are putting money into solar energy and biotechnology companies, according to the Dow Jones numbers. SolarReserve, a Santa Monica company, struck the biggest deal of the quarter, raising $140 million. Five of the 10 biggest deals across the U.S. were done with solar and biotech companies.

But other start-ups are going to have to try harder to prove their business can earn cash, said Mike Napoli, chairman of Los Angeles consultancy Absolute Return Group.

"It's definitely been tough," said Kim Kovacs, chief executive of OptionEase, an Orange County financial software company that said it had positive cash flow. A venture firm recently decided to invest in OptionEase, but that's still not enough to ease her anxiety.

"We're being very cautiously optimistic, instead of just optimistic," Kovacs said.


Times staff writers Jessica Guynn and Michelle Quinn contributed to this report.

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