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Mazin Ramadan considers himself lucky. Despite the seeming meltdown in venture capital spending, his startup, Seattle-based 4thpass Inc., announced on May 7 that it had snagged $8 million in seed capital. Ramadan attributes his good fortune to a solid business plan, a seasoned management team, and promising technology. "There is money," says Ramadan. "But you have to have a really good story, have done your homework, and be ready with customers. Venture capitalists aren't just going to buy anything."
The amazing thing is that they're still buying at all. Total VC investing sank 43%, from $20.5 billion in the fourth quarter of 2000, to $11.7 billion in the first quarter of 2001, according to researcher Venture Economics. But when VCs do buy, it looks increasingly like startups are where they want to put their money. Although the percentage of early-stage financings remained steady at 14% over the previous two quarters, 21% of all venture dollars have gone into startups so far this quarter."GOOD DEALS." What gives? Experts say the relative strength of the startup marketplace stems, at least in part, from the continuing quest for the next great idea. But even more important, they say, it's a reflection of a healthier business environment for new enterprises that don't come with the baggage from the recent tech frenzy. For instance, dot-com bankruptcies and layoffs at tech giants have suddenly made recruiting talented execs and employees a breeze. Obtaining office space, as well as professional services from headhunters and lawyers, has gone from being a costly ordeal to a simple task.
And the sky-high valuations of unproven fledglings, which landed many VCs in hot water last year, are a thing of the past. The average price for startup deals fell from $20 million in the last quarter of 2000 to $14 million in the first quarter of 2001, according to Venture Economics. "Overall, the cost of doing business is much, much less than it was a year ago," says Tracy T. Lefteroff, managing partner of private equity and venture capital at PricewaterhouseCoopers. "It leads venture capitalists to be very active in looking for good deals."
Those so-called good deals are showing up in some unexpected places. Surprisingly, many investors are as enamored of the Net as ever. Of the 236 seed financings in the most recent quarter, 148 are Net-related, says a PricewaterhouseCoopers/Money-Tree survey. The vast majority of those companies, some 136, are being built around the hardware and software tools needed to help consumers and businesses make better use of the Internet. For instance, Ecount.com, a next-generation online payment system, landed $11 million earlier this year. B3, a business-to-business software maker, nabbed $15 million, and Peribit Networks Inc., which is developing technology to improve network performance, got its first funding in January.
Despite all the financial woes and turmoil in the telecom sector, investors are also lining up to place bets on wireless startups. Wireless, in fact, is one of the few sectors, along with biopharmaceuticals and medical devices and equipment, in which the net dollars flowing into startup deals are going up. Total spending on wireless equipment and services ventures rose from $59.5 million in the last quarter of 2000 to $93 million in the first quarter of this year, says PricewaterhouseCoopers. "Everyone is looking for the killer application in the wireless space," says Jesse Reyes of Venture Economics.
It's all pretty optimistic, considering the countless millions already lost in wireless investments and technologies. Now investors once again are willing to pour--and quite possibly lose--many millions into more risky deals. Still Geoffrey Y. Yang, a partner at Redpoint Ventures, says the time is right to bet on wireless because mobile technologies and devices are improving, and networks handling data are becoming standardized. That's why his firm and Accel Partners in January funneled $38 million into Tahoe Networks, which develops tools to speed delivery of data to mobile devices.
No one, of course, expects funding to return to its record pace of the last three years. Indeed, experts say venture funding overall will continue to be sluggish. But as long as some investors are willing to roll the dice on a few good ideas and businesses, venture-capital money ought to keep right on flowing. By Linda Himelstein in San Mateo, Calif.