VC funding a victim of the times

-- Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com --

By Deborah L. Cohen

A year ago, it would have been relatively painless for online startup VolunteerSpot to raise half a million dollars from venture capitalists. But times have certainly changed.

"We came into our active beta at a time when the market shifted," says Karen Bantuveris, founder and CEO of the venture that helps schools and non-profit groups schedule and communicate with their volunteer corps. "We were just about ready to cross the tape and we've been told we've got to go another 26 miles."

Instead of hunting for VC dollars, the company and its staff of four full-time employees - which has raised $175,000 from friends and family - are tightening their belts, forgoing salaries and trying to form partnerships with some of the non-profits they aim to serve.

"We're getting creative on stretching it," says Bantuveris of the Austin, Texas-based company that likens itself to the party-planning site Evite.com. "(VCs are) not going to look at a company like ours until we can show up with a certain amount of revenue and a certain amount of eyeballs."

Around the country entrepreneurs like Bantuveris are bracing for a rough year of private equity funding, according to the National Venture Capital Association, which will release a poll of its member firms' outlook for 2009 on Dec 17.

"I think we see frankly pessimism in the short term and positive (outlook) in the long term," says Mark Heesen, association president, offering Reuters.com some early insights based on a preliminary review of some of the expected 400 responses to the annual survey.

"Most venture capitalists don't think the IPO market is going to open up in 2009 and that it's going to be a difficult time for portfolio companies that are either trying to get acquired or to go public," he says.

The association expects that the overall VC investment level for 2008 will track at $30 billion, roughly equal that of 2007, he says. For 2009, it sees a "slight decrease." The difficult market ensures that only the most driven entrepreneurs will find funding.

"Those companies that are going to get funded are very solid companies," Heesen says. "If their idea was not worth a hard, tortuous effort to get financing going forward, they would not be out in the market."

DRYING UP

Interest in technology startups has been drying up as both corporate and consumer technology spending - sensitive to the downturn in the overall economy - slows, he says. VC interest continues to shift toward areas that are largely unaffected by the recession, including alternative energy such as wind and solar power, water purification, battery technology and environmentally friendly smart buildings.

"Ordinary citizens are realizing that we're living with a very finite resource - oil - and that we have to make some fundamental changes when it comes to energy," Heesen says, noting that the new Democratic presidential administration led by President-elect Barack Obama is likely to accelerate clean-energy efforts.

In the near term, startups are expected to limit their capital spending and make the most of existing resources. If companies that had previously secured initial rounds of financing go back to their VCs for more money, they risk lower valuations, says Jack Biddle, general partner and co-founder of Novak Biddle Venture Partners, a Bethesda, Maryland firm that invests in early stage companies and has more than $580 million under management.

"Pricing is way down," Biddle says. "If a company raised capital a year ago and they missed their plan and they have to go raise capital again, they're either not going to get it, or it's going to be at far lower prices than their last round."