Chasing VC Bucks in Texas
For venture capitalists, the lack of investment exit options make them reluctant to take on new telecom deals. There hasn't been a telecom industry initial public offering in many months and, so far in 2002, the global mergers and acquisitions market is at its lowest level since 1994 -- yielding $330 billion in 5,600 transactions, according to Ray Sheeler, a consultant with CBIZ Valuation Group Inc., a valuation and litigation advisory firm.
To top that off, public companies have made deep and frequent staff cuts in order to try and slow plummeting valuations. "The telecom sector added 330,000 jobs in the boom times, but it cut some 500,000 during the recession," Sheeler says.
The result is that venture capitalists are slow to pull out their checkbooks. "It seems VCs are happier with all of nothing than part of something," he says.
Part of the problem is that the market's plunge has made valuing companies difficult. With so few telecom companies going public, it's hard for VCs to find comparable companies to measure their portfolios against. One solution to this is to revert back to hard numbers. "Look at assets, cash, inventory, and start to triangulate from there," says John Adler, a venture partner at InterWest Partners.
But what works against hard numbers are remnants of the bubble mentality that entrepreneurs sometimes exude. "I'm beating on everyone to try and get prices down in telecom systems companies," says John Jaggers, a general partner at Sevin Rosen Funds. "I think the industry went way overboard in funding systems companies, and now those deals are just too expensive."
It's no picnic for entrepreneurs, either. Rather than espousing their vision and chasing their dream, many find themselves behind a desk coming up with loads of contingency plans in case, once funded, the economy gets even worse.
"Raising money now can be depressing because you're talking to VCs about the 12 or 13 plans you have in case everything goes wrong," says David Heard, president and CEO of Santera Systems Inc.
Heard's advice: "Take investor feedback and market sentiment in 500 milligram doses. You don't want to overdose on pessimism.
"Take your 500 milligram doses and just realize that what you get is probably your company's valuation… I've never seen a company go under because of [stock] dilution."
Of course, VCs aren’t the only game in town. Two panelists -- Elie Akilian, president and CEO of Inet Technologies Inc.; and Anousheh Ansari, founder of Telecom Technologies, acquired by Sonus Networks Inc. (Nasdaq: SONS) in 2000 -- recounted tales of bootstrapping their respective startups with family money, credit cards, bank loans, and demanding upfront payment on customer contracts.
"Be careful who you choose [as investors]," says Ansari. "Everyone's paranoid now and they might become too involved.
"In the tough times, you don't want to be sitting across the table from someone who has no clue about your business."
Another nugget: "Don’t confuse our goals with yours," says Charles B. Humphreyson, a general partner with HO2 Partners. "To you, an IPO is just a subsequent financing. Our goal is the IPO, because we have to return capital to our limited partners."
And if the VC or bootstrap route doesn't work, there are always angel investors, who only have to answer to themselves. Be careful, though. It's sometimes tough to understand what they're looking for.
Just ask Bo Hedfors, the former Ericsson AB (Nasdaq: ERICY) CEO who now advises Cyneta Networks Inc. and Spatial Wireless, runs his own consultancy, and serves on the board of Openwave Systems Inc. (Nasdaq: OPWV). "The best way to understand what I'm looking to be involved in is to look at what I am involved in," he says.
That might not be very illuminating for the entrepreneur sitting in darkness.
— Phil Harvey, Senior Editor, Light Reading