It's not easy raising capital these days, especially for first-time entrepreneurs. But it's no picnic holding the purse strings, either. Venture capitalists, stung by ill-conceived investments in dot-coms, have become tight-fisted. With acquisitions and the IPO market stalled, VCs expect the lethargy to last through the summer, if not the rest of the year.
So what are fund managers doing these days? Tending to the home fires. They're pushing portfolio companies to produce revenue sooner and making tough calls about which ones to keep funding and which to let die. "That's the toughest decision a VC makes," says Patty Abramson, co-founder and managing partner of the Women's Growth Capital Fund, a $30 million venture-capital group in Washington, D.C., that invests in companies owned or managed by women.
The VC business is, at heart, Darwinian. "If they can't be adaptable and if they can't figure out a way to shift their business model that will lead to profitability, they're not going to get funded and they're going to fold," says Abramson.
She should know. Women's Growth Capital Fund has seen two of its 16 companies -- Physician's Quality Care and womenCONNECT.com -- go under. Both were based on business models that didn't pan out. A third company, online marketplace EqualFooting, is shifting its focus from small businesses to large companies.
To date, the fund has done just one deal this year, a follow-on investment in Outbounder, a software company with a messaging platform. Yet Abramson hasn't cut back on her schedule of investment conferences. It's important to "stay current" by meeting entrepreneurs and networking with other investors, she says. Abramson recently spoke with BusinessWeek Online reporter Julie Fields about the pressure on CEOs to perform and what VCs are looking for now. Edited excerpts from their conversation follow:
Q: What's different about the way you're evaluating companies today, compared to a year ago?
A: We're looking for companies with a path to profitability. That means we're looking for companies with a revenue model that's going to break even or be profitable on this round of funding. And we're looking for companies whose technologies don't require major behavior modifications. People don't change the way they do things very quickly -- or not as quickly as we once thought they would.
Q: A lot of companies that were funded had fairly young management teams. Is that changing? Are VCs pressuring companies to bring in managers with some gray hair now?
A: Absolutely. The reality is, they could have used some people who've sold companies before, who knew how to strike the deal, and how to put these partnerships in place. I think they're beginning to see that there's a need for some adult supervision.
Two years ago, you could have an "A" technology and a "B" management team. Now you can't. You need an "A" technology and an "A" management team. In reality, it's going to be survival of the fittest.
Q: One of the biggest complaints of entrepreneurs in recent years was the shortage of talent. Is it getting easier to find that "A" management team?
A: I think it's definitely getting easier, because there's a lot of really good talent out there. I have a dozen resumes on my desk every week from really good people, people who've been CEOs and COOs of early-stage companies.
Q: How do you evaluate someone whose track record includes stints at failed companies, dot-coms or otherwise?
A: You focus on a person's reaction to challenge, their flexibility in dealing with change, and their ability to keep a team together under pressure. Actually, a challenging situation makes great material for an executive assignment.
Q: Any predictions on when acquisitions and IPOs might pick up again?
A: The general consensus is that things will be pretty sluggish through the end of 2001. Despite the Fed's recent moves to jump-start spending, we think the weakness will last for some time. Consequently, we're working with our companies to ensure they have enough liquidity to maintain business operations on lower sales levels through the end of the year.
Q: Do you think the fact that entrepreneurs are being asked to give up a bigger chunk of their companies these days in exchange for funding is at all dampening the entrepreneurial spirit?
A: The reality is, if you have a good percentage of something and that business gets merged, you're going to make a lot of money. You're not going to be Bill Gates, but you're still going to make a lot of money.