Startups scramble for venture capital
Better, but not great. That’s how local startups and investors describe the outlook for Bay State companies looking for venture capital in 2006.
New England venture capital investment grew substantially in the first quarter of 2006, with $872 million invested, according PriceWaterhouse Cooper’s Money Tree report. That compares with $644 million in the year ago quarter and $740 million in the previous quarter.Raising money is getting easier again but it’s by no means a snap, especially for early-stage startups says George Giansanti, who in late 2004 founded Marlboro-based spectroscope maker Spectra-Analysis.
It took him a year to hone the Spectra-Analysis business plan to a point where venture capitalists would entertain funding his company. Scrutiny of a company and its market potential, which has gotten more intense.
Using venues such as The Capital Network, a MIT-based non-profit that connects early-stage startups with investors, Giansanti perfected his pitch. Late last year, Spectra-Analysis raised a $1.35 million first round of financing, money that has helped propel R&D to the point where the company now has eight orders for its $150,000 units.
That scrutiny is a symptom of a maturing venture capital industry, says Emily Mendell, vice president of the National Venture Capital Association.
There are at least two underlying reasons for this: One is a savvier investor who learned from mistakes made in the dot.com bust era. The second is a greater focus on the global market for a new product or service.
Startups need to look farther geographically than in the past and consider competitors in Europe and Asia as well as those domestically. That means more refined and insightful business plans, Mendell says.
In life sciences especially, early- and mid-stage startups can have a tough time finding investors, says James N. Little, senior vice president of Cetek Corp. in Marlboro. The 9-year-old cancer research company closed a $10 million, fourth round of financing in Dec. when its previous investors increased their investments
"Although we’re not an ‘early-stage’ startup, we don’t yet have stuff in the clinic and venture capital firms avoid that."
Still, early-stage Bay State companies are having an easier time finding money than in the past. "I’m seeing about 40 to 50 early-stage New England companies, mostly in
MA, get that first round of financing,"
says Ian B. Carver, director of PriceWaterhouseCooper’s Entrepreneurial Service Center in Cambridge. "It’s actually a fairly good time to try and raise money if you are a company that’s back-able, with the potential to fill an unmet need."
A big part of this increased scrutiny includes greater attention to a company’s management team. Big-name academics or battle-proven entrepreneurs can lend significant weight to term sheets a company gets.
Optasite Inc., a Westboro-based tower developer, recently closed on a $60 million financing round and a $65 million credit facility. An important piece of that funding matrix was the succesful track record of its executives. CEO Jim Eisenstein was a founder of tower-behemoth American Tower Co. and CDO Jim Ross founded several smaller, successful tower companies.
While pedigree can get attention, it’s certainly no substitution for a good business plan, a promising company and a strong market, says Eisenstein.
Startups themselves should follow the lead of venture firms and increase their scrutiny as well, says Tripp Peake, managing partner of the joint Long River Ventures and Worcester Capital Partners.
Peake’s advice: "Get some help and references and connect with the five or six venture firms out there that might be right for you.
Kenneth J. St. Onge can be reached at kstonge@wbjournal.com
WBJ Web Partners
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