Syncplicity, a startup online data management company, announced last October the closing of its post-seed funding round for US$2.35 million. The company offers an automated, all-in-one service for online and offline file syncing, backup and sharing.
Silicon Valley-based True Ventures led a group of private investors in compiling the funding pool. Syncplicity will use the funds to accelerate enhancements and extend functionality of its on-line service to speed up the growth of its customer base.
In what Syncplicity CEO Leonard Chung describes as a more challenging investment environment, his company was one of few early-stage startups that won the endorsement of investors. He started his company in April 2007 and then recruited two cofounders.
“Syncplicity is an example of a really good entrepreneurial founder who started out attempting to raise a much larger round because of a perception that he needed to raise that much larger round to get the attention of Sand Hill Road,” Phil Black, cofounder of True Ventures, told the E-Commerce Times. “He didn’t need a $5 million round of capital at that moment, and his characteristics were a perfect fit with the True Venture model of raising a smaller round of capital to get launched and start the process of expanding its market.”
Funding Woes
Venture capitalists invested $7.1 billion in the third quarter of 2008, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association based on data provided by Thomson Reuters. That reflects a 7 percent decrease compared to the second quarter. Internet-specific companies received $1.1 billion in the third quarter, a 36 percent decline in dollars over the second quarter of 2008.
“The data for Q4 will be fairly telling. We had been on a $7 billion-per-quarter investment pace as an industry, and I have to assume that those numbers will be lower. The early, early stage investments are somewhat valuation insensitive, but prices will be generally lower,” explained Black.
In this harsher investment climate, Chung steered his young company through a rough course that other startups seeking funding failed in traversing. True Ventures invests in promising entrepreneurs at the earliest stages in the highest-growth segments of the technology market. The partners at True Ventures have started more than 10 companies as founders.
“We’re very focused on the team that we invest in and felt that Leonard Chung and his cofounders have what it takes to succeed in today’s entrepreneurial market. We believe Syncplicity is best positioned to emerge as the dominant player in this space,” stated Black.
The company has the ability to integrate with Web applications and mobile devices as well as adhere to open, Web-based standards and industry standard protocols, explained Black.
Niche View
Having successfully weathered a critical storm, Chung has an unusual view of the window for fundraising that has essentially frozen shut. That freeze makes the ability to secure funding today extraordinarily difficult. This is particularly true for young tech startups like his that are looking to close their Series A round, noted Black.
The E-Commerce Times discussed with Chung his timely perspective about the state of the fundraising environment and challenges he faced.
E-Commerce Times: How does your company’s vision differ from that of others in the data management services?
Leonard Chung:
The great need for businesses is having the data you need before you know you need it. Many large companies offer this for a high price. We are the only company to offer a complete turnkey and support solution for data management through the Web. We offer an open API (application programming interface), support for many platforms and accessibility. This is our Software as a Service (SaaS) delivery model.
ECT: How does your pricing structure compare?
Chung:
Most of our competition offers traditional backup with high operational expenses. We provide a cost savings to SMB and consumers through our cost-effective online service. Most businesses pay about $30,000 for a VPN (virtual private network) solution for all of this. We are 10 times less. We are still adjusting our pricing structure for services that will be added. We are growing our customer base and are adding features.
ECT: How was your quest for funding different than you expected from previous experiences in raising capital?
Chung:
We got through the very beginning of the economic downturn. Then our venture capital source renegotiated. This is an example of the golden rule of VC financing for startups. The man who’s got the money makes the rules. The typical process used to be that to get a business appraisal and use it to come to an agreement on the term sheet. Then the startup goes to due diligence and then gets the funding. Now what is happening is the VCs are renegotiating the evaluation in the due diligence stage. The startup has nothing to fall back on, so this new process leaves the company in a lurch with Series A funding for all or get nothing.
ECT: So you had trouble raising the amount of funding you needed because of the current economic downturn?
Chung:
We computed the value of our company based on a business model plus an industry multiplier. This multiplier is based on different evaluation models depending on the industry involved. A startup with no revenue yet is forced to rely on a guesstimate of future value to get new a multiplier. The lower the multiplier, the worse the money deal. The new formula leaves less money for the start-up with more ownership of the company held by the VC funding agency.
ECT: How is this situation impacting technology start-ups?
Chung:
Another factor is that the deal volume is not uniform. The so-called VC math has gone out of alignment over the last few years. As a result, VCs are not giving out money because SMBs are not taking the deal.
ECT: So you are saying that VCs are now presenting a new attitude toward technology start-ups?
Chung:
It used to be that SMBs would come with a plan written on a napkin to a meeting with a VC agency. Now VCs are demanding more preparation. For instance, VCs want more investors. As a result, entrepreneurs are increasingly going to different sources of funding, such as angel backers. Another change is that [because of the funding crunch] companies are starting without having full capacity in place. Instead, they use a pay-as-you-go model. For instance, we started Syncplicity by renting storage and servers as we go.
ECT: What is the impact in terms of dollars and cents?
Chung:
This change in the VC funding environment is leading to different economics. It used to cost $4 million to launch a company. Now you can do it on hundreds of thousands of dollars because you don’t have to buy everything. A lot of VCs do well with their first funding round, maybe $100 million. Each partner needs $33 million to bring to the table. But for the second round of funding, SMBs expand, and this forces up the amount each partner has to kick in.
ECT: You mentioned earlier that start-ups are not getting what they need from VC funding or are rejecting the funding offer due to its high stake. What other options do start-ups have?
Chung:
I am seeing a lot of people taking initial money from angels and friends and family. VCs take a huge chunk of a company. Angels require a smaller amount of money at lower equity. Angels are moving into that spot and doing more than VCs.
ECT: So you took Syncplicity in a different funding direction?
Chung:
We took money from True Ventures in the early stages. The company makes money from management fees. The difference is that VCs tend to push for more money.
ECT: Where do you see this economic downturn going in terms of the VC funding space?
Chung:
I’m seeing entrepreneurs being more savvy about from where they take money. VCs are now only one of several funding sources. I am also seeing VCs not providing money initially but instead waiting for series B and C funding rounds.
Clarifying Round
The E-Commerce Times asked True Ventures’s Black to comment on the VC funding market. Black agreed that the angel funding developments could play a key role.
“I think the more interesting data from our standpoint is the angel market. That market will be significantly impacted. Not only are individual angels feeling poorer, there is an added concern about whether or not the angel-funded company will get that next institutional round,” he said.
For instance, True Ventures continues to invest alongside angel investors over 75 percent of the time. His company removes the financing risk in the early stage for those angel investors, he explained.
As for new hurdles that technology startups might face, Black sees none in the actual process. But that process will be elongated, he said.
The assumptions about revenue generation and customer acquisition will be more detailed and thoroughly examined. Entrepreneurs may opt to bootstrap or raise lower capital to get started. This will bypass the large institutional rounds and requirements, he concluded.
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