Where have all the VCs gone?

June 1, 2001
I'm finding it difficult to find venture capitalists (VCs) who are interested in funding my telecom start-up. What's happening?
1304qa Chang New
Q: I'm finding it difficult to find venture capitalists (VCs) who are interested in funding my telecom start-up. What's happening?A: Venture money is still available, but it is harder to get in today's environment. Given recent stock-market performance, the VCs attitude is, by and large, "Let's wait and see; it'll only get cheaper." This view is not likely to change until a couple of months after the IPO market recovers. Another reason VCs aren't aggressively making investments is that many have already committed a large percentage of capital to optics. They also do not like to make capital calls at this time. People invested in their funds are most likely a lot poorer today and therefore over committed, and may not be in the mood to be reminded of their folly.

It is especially difficult to get seed funding, because the view is "the easy ones are already funded," and frankly it is hard to discern significant differentiation in many of the business plans. So, entrepreneurs expecting valuation as in the good old days are not even going to get a hearing. For companies that got funded in the last year or two, a high percentage are now in need of additional funding. The feeling there is that, "I overpaid because of all that hype and now it is time to average out." Since IPO hype is not going to be back any time soon to bail out those investments, another conclusion is, "I am not going to chase good money after bad." So valuations have come down dramatically, and many marginal companies are going to be shut down. For viable companies, VCs are making bridge loans to avoid arguing over valuation, and are demanding warrant coverage for taking the capital risk. That is, they lend the company money in return for the rights to convert the loan to stock at a discount from what the next-round investors will pay.

In short, the scene is not pretty out there as we are paying for the joyride of the last couple of years. My suggestion is for you to be critical of your business model and approach investors with a realistic valuation. What is happening is a healthy adjustment for our industry. The over exuberance may not be back, but better days are definitely ahead. What matters is our industry has the innovative products that can serve telecommunications needs well.

Q: Is it a good time to start a company?A: Any time is a good time to start a company. There are actually some advantages to starting one now, in spite of the fact that it requires more effort to raise money and to pry people loose from established companies. I recall that Silicon Valley was quite depressed when New Focus was founded in 1990. Although we were a start-up, we were able to get attention from professional service providers such as accounting and law firms, get cheap rent, buy used office furniture and lab equipment at good discounts, and have responsive machine shops make prototypes. These aspects sound trivial, but they can be difficult issues during boom times. Hopefully, the market will recover by the time you are ready to ship products.Q: Can you give me any time-management tips on how you manage so many companies?A: Maybe the time-management tip is "I don't manage them." Rather, I provide pointers and bring resources to help the company management succeed. That is, I leverage my time and do not dwell on areas in which I am not particularly good. The most important insight on time management is to be decisive so you can be the master of your own time. That could mean simple things like quickly disposing of the quasi-junk mail that really doesn't deserve your attention and saying "no" to people who ask you to do things that are of no interest to you. When you intuitively prioritize how you spend time, you will have more time for things that matter. Beyond that, I'll defer to the many good books written on this subject. Q: Any downside for making my small VC investor the chairman of the company?A: Assuming he is all heart, then being the chairman could give him more of a sense of ownership, resulting in him spending more quality time helping you. This position also gives him more control over what the company does. The chairman can greatly influence the outcome of a decision because directors are respectful of each other and will rarely get down to counting votes. The thing that worries me a bit is this is a highly visible position; the size of his fund could mean he has less prestige to attract top-tier VCs to participate in the next round of funding, or convince notable individuals to serve on your board.
About the Author

Milton Chang

MILTON CHANG of Incubic Management was president of Newport and New Focus. He is currently director of mBio Diagnostics and Aurrion; a trustee of Caltech; a member of the SEC Advisory Committee on Small and Emerging Companies; and serves on advisory boards and mentors entrepreneurs. Chang is a Fellow of IEEE, OSA, and LIA. Direct your business, management, and career questions to him at [email protected], and check out his book Toward Entrepreneurship at www.miltonchang.com.

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