Start-ups don’t wait long for venture capitalists

Start-ups don’t wait long for venture capitalists

SAN FRANCISCO Four months to six months. Only a year or two ago, that
was how long start-up companies generally had to cajole, fret and act
nonchalant while waiting for venture capitalists to part with money –
if they proved willing to write a check at all. Even during robust
times, the period between a first pitch meeting with a venture
capitalist and financing typically spans three months.

So imagine the surprise of those behind a start-up called XenSource
when they began shopping for cash this summer on Sand Hill Road in
Menlo Park, California, Silicon Valley’s venture capital version of
Wall Street, and had seven firm offers within three weeks.


XenSource, which has developed software that runs several operating
systems simultaneously on a single computer chip, is 18 months old. It
has yet to book a cent in revenue. But so different is the current
venture climate when compared with just 18 months ago that the company
was able to raise $17 million.

"If we had gone up and down Sand Hill, we could have had 25 offers,"
said Nick Sturiale, a partner at Sevin Rosen Funds. "There was that
much interest in the company."

Not a great many companies are that fortunate, but XenSource is not
unique, and scores of start-ups are finding that venture investors in
recent months have been receptive. After several years of caution and
hesitation, if not outright fear, the venture capitalists are again
opening their wallets to the start-ups.

The primary beneficiaries of the current venture boom are technology
companies, but if the past is any indication, that portends good news
for start-ups of all shapes and types.

Most of the new companies will fizzle, but the fear of missing out on
the next Google or Skype, the two-year-old Internet phone company that
eBay plans to buy for as much as $4.1 billion, is causing something
rarely seen since 2000: fighting among venture capitalists to own a
piece of the hottest properties.

"We’re hearing much more about elbows being thrown, especially if
you’re talking to people in Silicon Valley," said Mark Heesen,
president of the National Venture Capital Association. "There’s a lot
of competition out there."

And venture capitalists are once more showcasing their successes and
providing references to entrepreneurs they want to impress. Any number
of Silicon Valley venture capitalists will attest to the new
competition, including Tod Francis, a managing director at Shasta
Ventures on Sand Hill Road. "Over the last six months, we’ve seen a
general increase in activity," Francis said. "And we fully expect there
will be another jump in activity as we move into the fall."

Shanda Bahles, a partner at nearby El Dorado Ventures, also noted a
marked increase in competition in recent months. "Today, if you see an
opportunity you like, you have to move quickly," Bahles said. "Because
you know that it won’t stay on the shelf long."

"Two years ago," she said, "if you saw something you liked, you could
watch it for a few months, see what kind of progress they’re making."

There are many reasons things have gotten more competitive, starting
with a spike in the money the professional venture capital set has
raised from foundations, university endowments, rich individuals and
others. Venture capitalists raised more venture money in the first half
of 2005 than they did in all 2003, and the $6.1 billion they raised in
the second quarter bests any three-month period since 2001.

"People have fresh money," Bahles said. "They’ve figured out what went right and what wrong the last time."

The phenomenal market for initial public offerings propelled the
venture boom of the late 1990s. The current market remains sluggish,
enormous successes like Google notwithstanding. But by all accounts
that other inspiration for venture deals, big-money acquisitions, is
once again hot. Deals like Skype and the $580 million that News Corp.
paid in July to buy Intermix Media, the parent of MySpace, a social
networking Web site popular with the under-30 set, are proving
inspiring to venture capitalists.

"We’re on track for our best year for mergers and acquisitions since
2000," said Richard Peterson, chief market strategist for the research
firm Thomson Financial.

There have been $7.16 billion in mergers and acquisitions through
mid-September, according to Thomson, compared with $5.5 billion in 2003
and $8.3 billion in 2004. Francis, the Shasta managing director, said:
"All of us are noticing that smaller companies are being acquired by
larger ones at reasonable and healthy valuations. It’s like a better
party, and it encourages more activity."

There is also the widespread growth of broadband Internet access, the
popularity of Web-based cellphones and the emergence of a second
generation of start-ups that are building on the successes and failures
of the first. These and other factors are ushering in a renaissance of
new start-ups, and venture capitalists are eager to take part in this
second wave of Internet innovation.

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