Funding for startups

Soul Searching

What's in a startup?

These days, Wall Street gives you one cynical answer: nothing but the cash on hand.

Just two years ago pundits were declaring the Silicon Valley venture capital model to be the future of global capitalism. Risk capital had put American technology companies ahead by leaps and bounds. Startups and entrepreneurs were king. Large monolithic corporations were dead.

Fastforward to the present. Cash is king, venture capitalists are loathe to fund anybody, public market investors are disinterested, and the large monololithic corporations are in a position to consolidate markets by snapping up startups or their assets at bargain-basement prices in bankruptcy court.

Silicon Valley, in short, has lost its allure. It's now the world's largest community of former paper millionaires collecting unemployment checks.

Massive terrorist attacks on America and the ensuing global political crisis have done nothing to help the situation, of course.

Cheery, eh?

The most telling sign of the times is the valuation of larger public optical networking companies that once commanded valuations in the tens of billions of dollars. Sycamore Networks Inc. now trades at a market capitalization of $1 billion, while it holds nearly as much in cash; Corvis Corp. (Nasdaq: CORV) trades at $576 million, while it still holds $726 million in cash.

Yes, those valuations in the tens of billions of dollars were absurd. But valuing these companies at cash-on-hand may be taking things to the other extreme.

Markets have reasons behind their actions. In these cases, the market is punishing these companies for poor use of the capital they acquired in their billion-dollar IPOs. That is, they burned much of the capital, mismanaged growth, and failed to generate projected profits or revenue targets.

Things aren’t any better in the private company market. Recent research by Optical Oracle, Light Reading's subscription research service, indicates that most private companies are valued at their total amount of funding -- if not less.

This brings us back to the crisis of confidence in the startup model. If we really believed in startup culture, would we value companies at the equivalent of their cash in the bank? Of course not. If that were the case, there would be no reason to invest (or even create) startups. Everybody would just put their capital in bank or government bonds and earn far better returns with the interest rate.

In better times, a young technology company would be worth more than its cash position. That’s because the market believes that some aspect of the company -- the technology, the people, or even the investors -- will yield more value out of the startup capital. Of course, everybody counts on a larger percentage of failures, but the high-risk bet is that the ones that pay off will more than compensate for the losses.

From the perspective of potential customers, startups have an allure. First of all, they are more willing to work for your business -- and perhaps offer more value. The technology is more likely to be cutting edge. Then, there's the promise of hiring a young rising star for pennies on the dollar of the cost of the aging, wealthy executive.

It was only when the startup value system was corrupted by the financial bubble -- i.e. the stock became of more value to customers than the product itself -- that this value system failed. Hence, today's cynicism.

For the leaders of this industry, including the investors, entrepreneurs, customers, and rank-and-file employees, it’s time to do some serious soul-searching. Do you still believe in the startup model? Are you willing to take the risks involved in either working at or funding a startup, in the belief that the advantages outweigh those risks? If you work at a startup, are you willing to focus on technology, people, and products -- rather than financial shenanigans -- to succeed?

If not, then it's time to get out (if you haven't already been booted). It’s time to restore this market to its core constituency: leading technologists and the savvy investors who think they can help them. We need to rebuild confidence in the technology startup. That said, there’s no room for the nonbelievers.

Those of us who remain will some day be rewarded. The value of technology companies will rise again. Startups will regain their nimble edge. And as for working in the startup technology business....hey, it's still a lot more exciting than shuffling papers at ABC Corp.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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