Digital Startups Face Funding Obstacles

OMMA Global Hollywood-StartUps and SolvencyHOLLYWOOD, Calif. -- Tough times for digital startups -- and those that need necessary financing--will continue for the better part of 2009.

Linda Gridley--president/CEO of Gridley & Co., a boutique investment bank--moderated the panel "Startups and Solvency: Who gets to Survive?" at the OMMA Global Hollywood conference. She said venture-capital money for digital companies sank to $28 billion in 2008 from a high of $35 billion in 2007--a peak year.

Expect that number to drop big-time this year. James Slavet, partner at Greylock Partners, who was on the panel, asked one private-equity executive how business was going. The executive answered: "Nobody around here is trying to be a hero."

Such reluctance will slow funding. Richard de Silva, general partner of Highland Capital Partners, believes a turnaround will not occur at least until the first quarter of 2010. Until then, he notes, new start-ups will have a hard time. However, "there'll be venture capitalists doing inside rounds," he said.

Still, there are deals being done. Shashi Seth, chief revenue officer of Cooliris, a digital technology company, said: "We just raised series B (financing) in this calamity--for a pretty sizable amount. This is great time to build a company."

For digital companies looking for second-, third- or fourth-round financing, it's better to consummate a deal now. Says de Silva: "The worst situation is at the end of fourth quarter when you have to do a deal--and you have limited options."

Better financial activity might be found in the M&A business, said Michelle Wroan, a partner in the communications and media area for accountancy KPMG. But even then, caution rules. "When you have companies trading at two or three times cash flow, that's not going to be attractive," said Gridley.

Greylock's Slavet added: "For many companies, it's a terrible time to sell. The advice we are giving is that you have to have clear eyes in how to operate the business. If there is a need to cut on the expense side, try to do it once [not several times]. Make sure you are communicating enough for your team."

de Silva said the deals Highland Capital is investing in are with companies that possess strong management teams and those with technologies that are truly differentiated. To that point, Cooliris' Seth added that in a downturn market, high-quality executives are more available than ever before.

Digital leaders are thriving not just with financing, but with advertisers. "Leading companies are doing well," says de Silva. "CafeMom is the No. 1 social-networking site for moms. They are a must-buy for consumer product companies."

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