Letter from Silicon Valley

The investors weren't exactly whipping out their checkbooks. "When I say we do early stage, I mean early revenue stage," said one VC.

If you want to gauge the balance of power between Silicon Valley entrepreneurs and venture capitalists, sometimes you have to read between the lines. Consider this exchange overheard at the Software Development Forum's showcase, in San Jose. Financial-software entrepreneur: "Do you invest in vertical plays?" (Translation: Is there a snowball's chance in hell that you will invest in my company?) Venture-capital investor: "We tend to be more horizontal-slash-diagonal." (Translation: No, no chance.)

I arrived at the Software Development Forum -- a nonprofit networking group funded by the city of San Jose and tech companies like IBM and Microsoft -- at 3 p.m. on a sunny December day. It had been three years since my last visit to an SDF showcase, a popular entrepreneur-VC mixer. Back then I was a member of a "presenting company" called MileNet (later renamed Gazooba and finally Qbiquity). My cofounders -- Zen and Shanti -- and I were overjoyed that our business plan had received a thumbs-up from the organization's VC panel.

We set up shop in a booth the size of a cubicle (in fact, it was a cubicle) and demo-ed our software, which awarded frequent-flier miles to people who forwarded the program to friends. Famous VCs from the likes of Draper Fisher Jurvetson peered in and tossed us their business cards like SeaWorld visitors throwing fish to the dolphins. Some asked us to make appointments. We didn't score any investments from the event, but we did gain the confidence to talk to deep pockets. And since we weren't taking salary, the free sushi and Snickers bars went a long way.

On my recent visit, however, I was seeking not money but insight. I wanted to know just how sorry the sorry state of fund-raising among tech companies actually was. Were VCs bludgeoning start-ups with obscenely low valuations? Was anybody getting funded at all?

At first blush, nothing seemed to have changed at the SDF offices. Management teams from 11 start-ups, all very early stage, stood in front of those familiar cubicles, which, like the desks of my elementary school, seemed to have grown smaller since my last visit. Few had signage more elaborate than a laser-printed 8.5-by-11-inch name card. Some had raised $100,000 or so from angel investors. Most had fewer than 10 employees. "We have 5, but one is kinda iffy," said Kevin Yurica, CEO and founder of TerraSeek Inc., which makes software that automates organizations' emergency-response plans. "He's like, 'I want to live in Nova Scotia, but I want to work for you guys, too.' "

As I strolled around, however, I found much that was different. Only one company's name began with an "E." The souvenir mints bore the logo of IBM instead of a dot-com. Although 100 people filled the space, there were few high-profile investors. Most attendees were looking for jobs or clients. And when investors and entrepreneurs did hook up, the investors weren't exactly whipping out their checkbooks. "When I say we do early stage, I mean early revenue stage," said one VC to a tongue-tied founder.

Another sign of change: the subject of paying customers came up far earlier in conversations than it had on my first visit. Vipin Samar, the energetic cofounder and CEO of MyBubble, was explaining to the seventh or eighth group at his booth how his software would prevent "knowledge workers from becoming assembly workers," when Hummer Winblad associate Prashant Shah approached. The two had last met six months earlier, and Prashant immediately asked for a customer update. "If I can just get funded, then I can go after some customers," Vipin pleaded. Prashant laughed. "These days you're better off going after the customers first," he said. When Prashant walked away, Vipin complained about the chicken-or-egg bind in which he and other entrepreneurs found themselves. "Even pilot customers, which would be using our software for free, want to know there's money behind us before they assign a guy to read our 50-page manual," he said. But he held out hope that things would improve within six months. "Every big company is talking about Web services, and when that takes off, I am a sure plug-in."

As at the 1998 event, some entrepreneurs were there simply as guests, hoping to chat up investors over hors d'oeuvres. While I nibbled on a teriyaki-chicken wing, Ken Singer, founder and CEO of Adjectivity Inc., explained to me that his software made it possible to use a cell phone to navigate the Internet without having to type commands. A potential investor asked if that meant Adjectivity was a mobile-commerce play. That was OK by Ken. "If you think M-commerce is going to be successful, we're involved in it," he said.

Ken has learned to be flexible the hard way. He dropped out of Berkeley to start his company "when it was still cool to do that," and since then the sailing has not been smooth. As Ken was complaining, between bites, that SDF's showcase had attracted too few investors and too many job seekers, a certified public accountant waved a card in his face. "I'll follow up with client references by E-mail," the CPA said.

But Ken has some perspective: he knows times are tough for everyone. Recently, he ran into a former Berkeley classmate, a guy who had scored an $80,000-a-year marketing job at a dot-com after graduation. "Now he's a scent sprayer at Macy's," Ken said. "When I saw him holding the Obsession bottle, I was like, 'Oh, no.' "

I guess if you live anywhere long enough -- even a sprawling, state-of-mind kind of place like Silicon Valley -- it starts to feel like a small town. Mingling among the showcase attendees, I bumped into Carl Nichols, managing partner of iMinds Ventures, a first-round funder for Gazooba. Carl told me that iMinds had done a few investments since the summer, including one the previous week. Although he was seeing mostly enterprise-software companies, the occasional new-economy business plan did cross his desk. "Yesterday we got one for a B2B2C play," Carl said. "I guess some of these guys think it's still 1999."

Also in attendance was Brian Goncher, Gazooba's former part-time chief financial officer, who once upon a time advised me on bridge-loan negotiations with Carl. Brian is now a VC himself, having joined Crystal Internet Ventures as a partner in February 2000. Brian said most of Crystal's investments these days were in "fallen angels," companies whose valuations had skyrocketed during the bubble and then had come crashing back to earth. One such investment was a "down round" that Crystal led in a software company at whose 2000 Christmas party my band had played. The company's previous investors agreed to lower the valuation from $70 million to less than $10 million, essentially writing off the $51 million they had already put in. "The tragedy is, you have to be pretty sure of yourself to go for funding right now," Brian said. "If you get anything, you're going to get a $2-million to $3-million valuation for a seed-stage start-up, just like it used to be."

The evening wore on and my pockets bulged with business cards. At about 8:30 I excused myself from a conversation with an event planner who was grousing about there being too few events to plan and wandered over to the cubicle in which Zen, Shanti, and I had done our demo in palmier days. Tonight the booth was occupied by Kevin Yurica, who was talking up his company's "real-time management networks."

"Was it a lucky booth for you?" Kevin asked me.

I thought back on all the adventures that Zen, Shanti, and I had "enjoyed" in the months following our presentation at the SDF showcase. The investor pitches, the move across the country, the cash crunches, the competition for software engineers, the groveling before clients, the software glitches, the fights over strategy, the budget wars, the hunt for office space, the financing battles, the boardroom struggles, and, ultimately, the hiring of our own replacements.

I told Kevin that, yes, it had been a very lucky booth for me.

Andrew Raskin is the cofounder and former CEO of Gazooba Corp. (now Qbiquity Corp.) and a contributing writer at Inc. Now that he is trying to earn a living as a freelance writer, he appreciates free sushi and Snickers more than ever.

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