BWSmallBiz -- Venture Capital October 9, 2009, 1:21PM EST

Left in the Lurch

(page 3 of 3)

Browse Issues

Story Tools

KNOWING WHEN TO SELL

In Engelbrechten's case, after his close adviser Cheatham left Jafco, "I knew we would need more funding to get us through the downturn, and now that was unresolved," he says. "My priority was making sure the firm was still committed," he explains, so he would know he wouldn't have to scramble for new investors in a stalled financial market.

Engelbrechten invited his new director, Nick Sturiale, to the company's offices for a business briefing and tour and arranged for him to attend his first board meeting while Cheatham was still there. That way, Sturiale could witness Cheatham's enthusiasm for the company and his support for the CEO. Sturiale was new to Jafco but, fortunately, had some experience in the semiconductor arena. "We had to do some educating as to what we were doing and why it was a good thing, but his having a little bit of a semiconductor background made it easier," Engelbrechten says.

In the first quarter of 2009, Jafco came through for GTronix, leading a fourth round of funding for $7 million. With three rounds of funding already under the firm's belt, it would have been painful for Jafco to cut its losses. And GTronix was starting to bring in revenue, making further investments less risky than if sales had still been some quarters away.

But there are other outcomes. When Cheatham left Jafco, it wasn't only GTronix that was left hanging. Quellan, another one of Cheatham's semiconductor companies, was acquired in August by Intersil, a publicly traded semiconductor manufacturer. That created a much earlier exit than Cheatham had anticipated. "I thought there would be additional [venture] financing, but it's too hard to build an independent company in sectors that are capital-intensive," says Cheatham. Given the circumstances, he doesn't think it was a bad result: "This way the firm got something of a return."

Quellan CEO Tony Stelliga characterizes the sale as "a tough call." Says Stelliga: "You're at a point where your technology risks are behind you, you have good prospects, customers, and market momentum." On the other hand, "There's not much going on in the IPO market, so your exit is less certain and you have an offer on the table. But that's what happens with startups."

Return to the BWSmallBiz October/November 2009 Table of Contents

Gunn is a contributor to BusinessWeek SmallBiz.