Chasing VC Bucks in Texas, Part II

(Editor's note: This the second article about a bunch of scrappy startups begging for cash on the prairies of Texas during the depths of the telecom depression. The first part is here: Chasing VC Bucks in Texas)

RICHARDSON, Texas -- There was no swimsuit competition at the Southwest Equity Capital Summit (SECS) Thursday, but it was a beauty contest just the same. In two separate hotel ballrooms, startups pitched their wares to an audience of venture capitalists and corporate and angel investors in hopes of raising some cash (see Startups Prepare for Pitchfest and Chasing VC Bucks in Texas).

The ballroom walls were covered with more advertising banners than a minor-league ballpark. The hotel, though exquisitely designed, sported a carpet pattern that might best be described as "paisley puke."

For some, such as Layer N Networks Inc. CEO Mike Salas, this marked the beginning of a funding hunt. Layer N is raising a $15 million funding round, its second round overall. Salas says the company needs a lead investor to come in with a $5 million to $7 million stake in order to shore up the round.

Money for a startup in 2002! Who'd a thunk?

Salas says he's not worried about rejection; investors are interested in security communications semiconductors now more than ever. "It’s a question of what the valuation will be when we do raise the money," he says.

Some have been looking longer. Traq-wireless Inc. CEO Jim Offerdahl says his company has been working on its third funding round, a $16 million round, for about nine months. It already has more than 50 paying customers, but winning investors still requires a lengthy courtship. "[Our Series C round] is 90 percent committed now," he says, "but it's typical these days to take that long to find funding."

About 150 companies applied to present, and fewer than 30 were picked, says David Gerhardt, president of The Capital Network Inc., the show's organizer. "We saw some where we said, 'Guys, don't give up your day jobs,' and some where we said, 'There's a diamond in there, but it needs some polish.' "

The "growth" companies held forth in one ballroom with dozens of mostly filled round tables. Investors spread out their notebooks, coffee, and digital devices while nodding along with the speakers, who were from companies that had already been funded beyond their Series A round.

Next door, in the section cordoned off for "early stage" funding, about 60 investors were crammed into four long rows of tables. The light applause and stony stares indicated a decidedly tougher crowd. Apparently, seed funding is for the birds.

Though the presentations in both rooms were at the general, non-technical level, the pitching startups still had to bring their "A" game. During one coffee break, the presenting CEO of an early-stage startup grumbled that he'd love to devour one of the donuts being served but was too afraid he'd get a jelly stain on his shirt just before his time on stage.

But even though some brought their "A" game, it wasn't enough. To paraphrase comedian Greg Fitzsimmons, some presentations were like an alien abduction: When they were over, you didn't remember anything but your ass really hurt.

Companies that didn't have revenues or couldn't boast a laundry list of top-tier seed-round investors had to find other ways to show their worth. In his presentation, jNETx president Steve Hollis showed a chart of revenue projections and, on another slide, pointed out that his company's burn rate was smaller, thanks to its Russian-based software development team.

"It's pretty easy to want money," says Hollis. "Whether some companies deserve it is another matter."

In the telecom space, opinions differed as to what size company was right for investment. Some VCs want startups to demonstrate tangible customer interest and a quick path to revenue; others want startups that are just out of the garage. "Now is not the time to be a startup selling product," says Michael Courtney, a partner at Wu-Fu Chen's Genesis Campus LP. "This is a time to be in development."

Indeed, some companies found they had been valued too high for their own good and are now dragging that albatross around while looking for the next funding round. T-Manage Inc.'s experience reflected that of several companies here. The company's previous investors are supportive. However, it needs a new lead investor to come in and revalue the company, meaning a down round is probably imminent, according to Jay Shreiner, T-Manage's chief financial officer.

Other companies couldn't be sure if their valuations were on the way up or down. Navini Networks Inc. fell into that group because it isn't sure how large its Series C round needs to be. CEO Alastair Westgarth says the range is between $10 million and $25 million and the company's board is mulling different funding scenarios daily. Navini has an enviable problem: It's got a backlog of orders and is trying to figure how many customers it can reasonably take on.

"If we were having poor [customer] traction but had good promise, I'd say let's cram a down round and move on," Westgarth says. "But it’s a different story with us."

That explains why Westgarth's presentation Thursday morning didn't have the obligatory slide that showed how much the company was looking to raise and by what time. "The worst thing you can do in a forum like this is telegraph some kind of specific valuation," he says.

At the end of the day, and despite their reluctance to unfreeze their funds, venture capitalists here were still popular. "These guys are like the star football players and the rest of us are just geeky programmers," says Andy Lammers, a graduate student at SMU. [Ed. note: We think VCs are more like the student council. They're supportive. They're connected. But they do whine and scream a lot behind the scenes.]When a VC quizzed a startup executive in the corridor, the grilled executive would grin from ear-to-ear, even while mopping the flop sweat from his forehead. Of course, congeniality will only get them so far.

— Phil Harvey, Senior Editor, Light Reading
www.lightreading.com