A Toasty VC Climate for Internet Entrepreneurs

Internet start-ups seeking venture capital support may be in luck, as a second coming of sorts seems to be in full swing for Web-based technology firms, which enjoyed a seemingly endless supply of cash during the dot-com boom of the late 1990s.

In September alone, General Catalyst Partners invested US$12 million in QuickPlay Media, Benchmark Capital sunk $20 million into VoIP provider Rebtel Networks, and a trio of VCs tossed $10 million at Nexaweb. Those are just a few of many, similar deals.

In fact, VC investment in technology firms has rebounded after declining for consecutive quarters in 2005, according to Forrester Research, representing more than $365 million in growth during the first half of 2006.

“There are certainly dollars going into Internet start-ups again. The stigma from the turn of the century is no longer there,” attorney Todd Rumberger, managing shareholder of the Silicon Valley office of Greenberg Traurig, told the E-Commerce Times.”VCs don’t roll their eyes if you tell them you have an advertising-based model because advertising is a viable means of revenue today,” he continued. “What they are looking for remains the same: innovation.”

Diverse Commerce

General Catalyst is proving Rumberger’s point. The Boston-based VC firm makes a practice of investing in entrepreneurs who are building technology-based companies that will lead innovation and transform industries. That’s a tall order for an Internet-based start-up looking for capital, but General Catalyst’s most recent investments offer hope to up-and-coming entrepreneurs.

General Catalyst saw ViTrue as a good bet. ViTrue uses video infrastructure tools to create meaningful interactions between brands and consumers. Consumers actually create messages for the brands they are passionate about. It’s a different twist on social networking that landed the start-up $2.2 million in funding.

General Catalyst’s other recent Internet investments include UPromise, a system to help families invest in tax-advantaged college savings plans. Sallie Mae acquired the company in June 2006. The firm also invested in Eons, a community aimed at senior citizens that was launched by Monster.com founder Jeff Taylor this summer, and JumpTap, a mobile search firm.

Seeking Capital Efficiency

“If you look back over the past five years, we’ve been investing in consumer facing companies, online media and e-commerce consistently,” General Catalyst Principal Neil Sequeira told the E-Commerce Times. “We’re just as interested in Internet firms today as we were in the late 1990s. One of the biggest differences between then and now is the cost of launching a business today is more capital-efficient. It doesn’t take as much money to launch today.”

Sequeira points to open source software solutions as one factor that lowers the VC’s risk by lowering the capital requirements. The Internet advertising market has also matured, so unlike e-commerce plays in the late ’90s that hung their model on an unstable online advertising-based model, today’s companies can show proof-points that cause VCs to take a serious look a viable business plans — even with higher valuation deals.

Speaking of Advertising

Sequeira, for one, is closely watching the growth of social media networks in light of the way advertising has been delivered to consumers over the past decade. Sequeira and his colleagues see a fundamental change in the online advertising model occurring. Google had its great idea to monetize search seven years ago. VCs are now looking for the next best bet.

“As online video and social networks grow, there will be more advertising companies trying to monetize these communities — and it won’t be through the traditional banner and ad networks,” Sequeira noted. “It will be new ways. We’re interested in those new ways.”

Progress Partners is also looking for “new ways.” Progress Partners focuses all of its attention on the e-commerce/Internet sector, which it now coins “new media.” The firm’s mission is to source investors and acquirers for these deals.

In the view of Frits Abell, the firm’s managing director, the current state of affairs feels reminiscent of the late ’90s — a lot of entrepreneurs that are long on ideas, but short on sound business models and strong management teams to spearhead these ventures.

“We sift through the four or five companies with which we meet weekly and work with those that can support their projections, and clearly outline the ‘solution’ they provide to a current ‘problem’ in the marketplace,” Abell told the E-Commerce Times.

Searching for Deals

Progress Partners is uniquely focused on deals in the “new media” space, which includes interactive advertising, Web 2.0, mobile phone advertising, word-of-mouth marketing, and the like. That’s both similar and different to the types of deals the firm scouted for in 1999.

“The deals with which we engage differ from those in 1999 in that we work with the entrepreneur to be humble and realistic with his or her projections, clearly define and strategize his or her unique competitive advantage, and ensure that he or she hires the most talented, appropriate management team,” Abell noted.

Another significant difference relates to investors, many of whom were burnt during the last Internet frenzy. This time around, they are suspect of the “newest hot deal” and require more realistic projections on where the ventures will be in five years.

“Conversely, we meet with many entrepreneurs who benchmark their path to success to that of Google or MySpace,” Abell explained. “Clearly, they have not yet learned the pricey lesson that for every Google there is carnage of thousands of new ventures that never got off the ground.”

Differentiation Key

At the end of the day, there are still far more entrepreneurs vying for VC dollars than there are VC dollars to invest. The biggest challenge for today’s hopeful Internet superstar start-up is differentiation — rising above the noise, according to Greenberg Traurig’s Rumberger.

“It’s still difficult to find the opportunity to tell your story, but if you do it’s got to be compelling,” he noted. “Investors aren’t looking for slight improvements. They are looking for something that is completely different.”