For Orange County technology startups these days, having a good idea is no longer enough to get a company off the ground.
Investors want to see entrepreneurs have a well-developed business plan that’s already reached some kind of milestone, according to Luis Villalobos, founder and director of Tech Coast Angles, a coalition of some 300 individual investors in OC and Southern California.
“Investors want to see something that’s proven,” Villalobos said. “The thought that someone will invest just to test out a good idea, those days are done.”
Such was the case with San Juan Capistrano-based OptionEase Inc., a maker of software that helps companies manage stock options accounting.
Going to investors with an idea is “fine to do when there is a lot of money flowing,” said Kim Kovacs, OptionEase’s cofounder and chief executive. “Today you need validation in the marketplace first, and then (you) go to VCs.”
Mission Viejo-based eGuardian Inc., which uses an online registration process to protect children from inappropriate Internet sites, also found that venture capitalists are more cautious.
“Every conversation with potential investors has a finance person in the room who is picking apart how we are going to make money,” said Chief Executive and founder Ron Zayas. “They are being much more conservative and asking questions about whether management knows how to run a business, rather than (focusing on) just a good idea.”
Lack of Capital
The credit crunch of the past year or so has dried up a lot of startup capital.
Among the Tech Coast Angels, “people are not investing as much as they typically do,” Villalobos said.
In 2008, the group did slightly more deals than in 2007, but the capital was “substantially less, and it’s continuing (to go) down,” he said.
Villalobos estimates that venture capital investing is at a 12-year low nationwide.
For some entrepreneurs, slim pickings means turning to their own bank accounts to get off the ground.
“We didn’t take a dollar of anyone’s money but the founders’,” OptionEase’s Kovacs said. “You have to be willing to put in your own juice to the point where you really have more than just an idea.”
Less Risk
OptionEase waited until it turned a profit before it looked for outside funding.
“This is the sixth startup I’ve been involved with, and one of the last things we usually try to do is achieve profitability,” Kovacs said. “But we retooled ourselves last year to be self-sufficient because there was no guarantee that we would be able to raise funds.”
Last month, OptionEase raised $2.5 million from a private equity backer. The deal took longer than expected, Kovacs said.
“We recognized last year that it was going to get very difficult in the capital markets,” she said. “Investors wanted a little more risk taken off the table before they would give money.”
EGuardian, which has nine workers, was self-funded when it started in late 2007. It raised some $600,000 from the Tech Coast Angels last year.
“We’ve been very frugal on asking for money, because control for us is very important,” Zayas said. “If you lose control of your company in a down economy, you will see it die.”
When it’s coming out-of-pocket, that bit of launch money has to last, said Erik Ekstrom, partner in the technology, media and telecommunications practice of Deloitte Development LLC in Costa Mesa.
“We are seeing a lot more self-funded, bootstrap startups,” he said. “You have to be much smarter about where you spend your money and spend it only on your critical path, where you potentially could attract investors.”
But even that’s a challenge,investors’ appetite for risk is smaller nowadays.
“Right now, money is skittish and no one knows where this economy is going” said Dan Lubeck, managing director at Solis Capital Partners LLC, a private equity firm in Newport Beach. “Investment activity has slowed a lot. I think tech is slower than typical because it’s higher risk.”
Investors are being much more selective about where they are willing to put their money.
“Whereas before they would put a bit of money here and there, it’s now more of a rifle shot,” OptionEase’s Kovacs said. “They want to make sure they will all pay off.”
With the market for public offerings at a standstill and valuations plummeting, it’s also tough times for startups that have been around for a while or are looking for an exit.
“The IPO market is on life support,” Deloitte’s Ekstrom said. “It’s nowhere near what we used to see.”
Some startups are seeing that the best chance for survival is being acquired.
Irvine’s Aktino Inc., a startup maker of telecommunications gear, was acquired last month by Canada’s Positron Inc. for undisclosed terms.
The company, started in 2003, had raised some $41 million in venture capital.
At the time it was bought, it had roughly $6 million in yearly sales and wasn’t profitable.
“Companies are much more long term in their visions and they’ve gotten more realistic,” Ekstrom said. “They may accept less money today, but they plan to continue operating their business within a larger company. They are going to look to be a success as part of someone else.”
Upside
The tougher startup environment isn’t all bad, though.
Some say it makes for better, more resilient companies.
“The bad times force you to think through your business model, to make sure it works and is effective, because nobody is throwing millions toward you anymore,” Tech Coast’s Villalobos said. “If you are looking to start a venture, you must be in line with the times.”
It also weeds out the entrepreneurs who are in it just to make a quick buck and favors those in it for the long haul.
“We like to see entrepreneurs who really want to bring a product or service to the market, because those are the ones that stay around in the hard times,” Villalobos said. “The ones who want to get in and cash out are typically gone, and that’s good.”
