ENTREPRENEURS IN THE CATBIRD SEAT: TAKE OUR MONEY, PLEAD VENTURE CAPITALISTS

Last June, when Fernando Espuelas started looking for venture capital for his fledgling firm, StarMedia Network Inc., he was lucky to have his phone calls returned. Today, as New York-based StarMedia seeks an additional $8 million, 90% of the calls Mr. Espuelas receives are unsolicited. They come from venture capitalists eager for a piece of his Latino-oriented online service company.

“At this point, we are really able to pick and choose those investors, beyond the money, who can help us leverage the company,” says Mr. Espuelas, StarMedia’s chief executive. “We now have the opportunity to select our partners based on who makes the most strategic sense.”

The roaring initial-public-offering market and the impressive success of New York’s Silicon Alley have opened the floodgates to a sea of venture capital money, turning once humble entrepreneurs into tough businesspeople. Cash alone doesn’t cut it anymore. Entrepreneurs want introductions to potential partners, high valuations on their companies and compatible work styles.

In some areas, say venture capitalists, money is so abundant that entrepreneurs are giving them a scant three weeks to come up with a binding commitment.

“An entrepreneur might say, ‘I have a term sheet on the table (from other investors), and they’ve already done two weeks of due diligence,’ ” says one New York venture veteran. “Right then and there, you have to ask yourself how badly you want it and is he bluffing.”

more than it needs

Driving owners’ brash assurance is $1.02 billion in venture capital invested in the New York metropolitan area in the 12 months through last September, up 51% from the year-earlier period, according to a Price Waterhouse survey. StarMedia, which is looking for $8 million, has been swamped with $25 million in offers, a heady number for a company that just nine months ago could barely get the time of day from most investor groups.

But companies tapping the venture capital market for the second and thi
rd time are writing their own tickets. When AdOne Classified Network Inc., which runs a World Wide Web classified ad site, got $4.5 million last year from Lawrence Smith & Horey, the venture capital firm made its wishes clear: AdOne had to bring in an experienced chief executive. This time, for a $12 million round of financing it expects to close next month, AdOne is calling the shots. It has hired high-tech investment bank Volpe Brown Whelan & Co. to seek out potential investors.

“One of the messages to investors is that the company has matured and management is such that we have been able to get a top-notch investment bank to represent us,” says the New York company’s chief financial officer, Brendan Burns.

AdOne, adds Mr. Burns, won’t take money from just anyone. It wants to partner with a direct marketer or major media company, or with venture capitalists whose portfolio companies could be natural partners for it.

Entrepreneurs are also raising the bar for investors, demanding more for their companies from eager backers. According to Coopers & Lybrand, the valuations of high-tech companies in the mid-Atlantic region receiving venture capital rose 41.4% between 1992 and 1996.

Tripled or quiNtupled?

James Tito, who is looking for $10 million in a third round of financing for his eShare Technologies Inc., thinks his two-year-old company is worth $25 million to $50 million. That’s up from $7 million a year ago. eShare develops software that lets Internet users interact with each other in real time.

Says Mr. Tito, “We have a released product, we have customers and we have revenue.”

While investors chase the top deals, start-up companies are finding it harder to raise money. “We are seeing a real shortage of money available for $250,000 to $1 million investments,” says Steve King, foun-der of Virtual Growth, an accounting firm that advises new media and high-tech start-ups.

Mr. Tito raised $6.5 million from Flatiron Partners over a year ago with no revenue. That would
be impossible today, says Mr. Tito. Now, investors want to see detailed revenue and profit projections.

“If a company has $500,000 in revenues,” he says, “investors want to know how long it took to get there, and when that figure will double.”

Crain News Service