The Scarcity of Start-Up Funds
Wednesday, December 31, 2008SUSIE GHARIB: It looks like California's governor has come up with a plan to fix his state's budget crisis. California is facing a $42 billion budget deficit. Governor Arnold Schwarzenegger plan calls for a $14 billion tax increase, more than $17 billion in spending cuts and borrowing against the future value of the state's lottery. The proposal now heads to the state legislature. State finance officials are urging quick action, they expect to run out of money in February and at that point could start paying the state's bills with IOUs. Businesses and investors have been hit hard by the economic downturn this year. So have entrepreneurs, who often rely on outside investors to get help to get their companies off the ground. As Dana Bate reports, getting start-up funding in this environment isn't easy.
DANA BATE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Say "start-up company," and you probably picture a company like PointAbout: casual office, cutting edge product, and a bare bones staff working the phones.
UNIDENTIFIED MALE: Going in with the iPhone is a good idea.
BATE: But the phone the company cares most about is yours. Co-founder Daniel Odio and his team have come up with software that can put Web sites on your mobile device, and tell those Web sites exactly where you are.
DANIEL ODIO, CO-FOUNDER, POINTABOUT: This is a real estate site that has said, I want anybody who is carrying a phone to be able to download this application and just walk around and see what houses are for sale around them. So it's going to open up here a list of properties that are for sale around us. We can see this one is 0.1 miles away.
BATE: So if you were outside, you could just go find this place?
ODIO: Yes, that's exactly right. I mean, that's exactly what we're doing right here.
BATE: But as a start-up, the company faces challenges in this economy.
ODIO: Really, to be successful right now you have to be ready to bootstrap and to have a real business with real customers paying real money in order to have enough runway to find some kind of funding source.
BATE: That funding often comes from venture capital firms, "VCs," in start-up lingo. Those firms get their money from sources like university endowments or pension funds. But money manager Michael Farr says stocks in institutional portfolios have taken a hit this year, meaning investments in venture capital now take up a bigger portion of the pie.
MICHAEL FARR, PRESIDENT, FARR, MILLER & WASHINGTON: When that happens, and institutions say, I now have a much -- an over-allocation to private equity, to venture capital, to these alternative investments and hedge funds, I'm not going to commit any more capital. In fact, I'd like to reduce that.
BATE: That means less money for venture funds and less money for start- up companies like PointAbout.
ODIO: It's difficult right now. And for inexperienced entrepreneurs, I would say it's probably not worth even looking.
BATE: Roger Novak runs venture capital firm Novak Biddle.
ROGER NOVAK, GENERAL PARTNER, NOVAK BIDDLE VENTURE PARTNERS: This is a time where cash is king.
BATE: He says even before the economy nose-dived, VCs had become increasingly cautious about funding start-ups.
NOVAK: This has been exacerbated by the current problem. And that has caused people -- a lot of people to say, if a company doesn't have $5 million in revenues, I'm not interested.
BATE: With only three paying customers, PointAbout hasn't hit that $5 million mark. For now, Odio says he's focusing on building his business until conditions improve.
ODIO: We've been having what I call the "first date" conversations with a lot of VCs where we're just getting to know them but we haven't asked them for money yet. But we want to make sure that they know what we're doing and that we're here.
BATE: Some business leaders worry the current environment could curtail U.S. innovation if no one is willing to fund companies at the earliest stages of development. But keep in mind, some of today's biggest companies were founded during tough economic times: just look at Apple (AAPL) and Microsoft (MSFT). Dana Bate, NIGHTLY BUSINESS REPORT, Washington.
