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FALL, 2006 
Venture Capital: The Spigot's On Startups are finding financing easier Don't we all wish it were this easy? Mark Britton, an attorney by training, was executive vice-president for worldwide corporate affairs at IAC/InterActiveCorp's travel business before he left to teach finance for a year in Italy. When he returned to California in the fall of 2005, Britton began laying the groundwork for an Internet company that would help consumers navigate the legal system. Britton mentioned his plans to Rich Barton, who not only founded Expedia and was Britton's former boss but also serves as a venture partner at Benchmark Capital. Barton passed the word to his colleagues, and in May, Britton's Seattle startup, seven-person Avvo, got $3 million from Benchmark. "We weren't looking for money," says Britton. "The money came to us." No doubt Britton's connections helped, but it is in fact getting easier for startups to raise venture capital. In the second quarter of 2006, 74 startup and seed companies raised money from venture investors, compared with 54 companies in the same period last year, according to the Money-Tree Report, a quarterly study by PricewaterhouseCoopers and the National Venture Capital Assn. (The study uses data from Thomson Financial.) While that's just a third of the num-ber reached at the height of the boom, it's the highest since the first quarter of 2001. Excluding the impact of last year's $320 million investment in insurance services company Integro Group -- an outlier if ever there was one -- the dollars flowing to those deals jumped 77%, to $292 million, in the second quarter of 2006. While these numbers may not sound enormous, they could be a sign of bigger things to come. Mark Heesen, the NVCA's president, points out that venture firms are projected to have raised some $75 billion in new money between 2004 and the end of 2006. Because that money doesn't need to be repaid for seven to ten years, venture investors have a relatively long time horizon for it. That means they're more willing to plunk it into startup plays that typically take many years to pay off. And for many entrepreneurs, especially of the dot-com and information technology variety, a million bucks goes much further than it used to. Thanks to the emergence of open-source software code, third-party Web services, and easily accessible blocks of code that programmers can use to build features such as online shopping carts, technology startups can get off the ground for a fraction of what the process cost during the boom. That's a problem for big venture capital firms, which need to put almost as much work into a $100,000 deal as they do into a $5 million bet, and so naturally prefer the latter. But newly formed specialty funds, in search of very early stage companies that often are looking for less than $1 million, are jumping in where venture capitalists can't go. Says Neil Sequeira, a partner at venture firm General Catalyst: "It is a very good environment to raise startup capital right now." Oren Michels, a veteran of blog search firm Feedster, has started a six-person San Francisco company called Mashery aimed at helping third-party developers create new applications based on Mashery's clients' existing Internet services. In May, the 43-year-old Michels raised a sum "in the mid-six figures" from First Round Capital, a two-year-old West Conshohocken (Pa.) firm created specifically to invest in startups, and some individual investors. With early stage technology ventures requiring smaller investments, some financiers are more willing to put money in at an earlier stage than they were a few years ago, Michels says. BOOSTER SHOT While the options have expanded for Internet companies such as Mashery, companies outside the tech sector are noticing a smaller, though significant, improvement. Rx3 Pharmaceuticals, a 10-employee San Diego company focused on the development of antibiotics, raised $800,000 from angel investors earlier this year. John Schmid, Rx3's CFO, says that while the company isn't actively looking to raise more money yet, some conversations he has had with venture investors indicate a change in the market. Two years ago, a drug company looking for funding likely would have needed to have already filed an application to begin clinical trials with the Food & Drug Administration. But Schmid says venture capitalists are now more willing to consider investing before that milestone has been reached. "It's a subtle shift," he says. For startups like Rx3, sometimes that's all it takes. To learn more about why VCs are going after small deals, see Online Extra: Earlier Is Better for Venture Capital  By Amy Barrett
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