Duly diligent

Maybe now the weeding-out process will actually start where it's supposed to start at the funding stage.

When all was said and done at this year's Wireless 2001 show in Las Vegas, one topic of discussion that seemed to command a considerable amount of attention had very little to do with the migration to 3G or the latest mobile Internet application. Instead, the spotlight was focused on a session called VC Investing: Where the Money is Going.

And judging from the number of show attendees crammed into the room, it's a question nagging more than a few wireless start-ups.

On hand to discuss their views on the subject was an A-list of the industry's financial gurus: Cliff Higgerson, partner of ComVentures; Dixon Doll, managing general partner of Doll Capital Management; Kevin Fong, managing partner of the Mayfield fund; Steve Hooper, managing partner of Ignition Corp.; and John Malloy, managing partner of Nokia Venture Partners.

Of course, given today's soft market, it's no big surprise that a frank panel discussion of wireless VC funding drew such a large crowd. As the session wore on, you could almost hear the audience utter a collective sigh and silently wonder, Is there any hope of finding capital for my fledgling company, or am I just totally screwed?

As with so many things in this industry, there was no pat answer.

The [investment] environment has gotten ice-cold, Doll declared. Now there's a cheery outlook.

Fong's view wasn't much rosier. Some 18 months ago, the $11 billion Mayfield fund was investing $300 million to $400 million per year in start-ups; now he estimates that it spends only $75 million to $100 million per year.

And according to Higgerson, though it used to take an average of two to two-and-a-half rounds of financing to fund a start-up company, it now takes four rounds and an extra 18 to 24 months. The amount of dollars available for a project has permanently changed, he said.

Not all of it was bad news. One silver lining of a tighter VC market is that when valuations are lower, start-ups can price early-stage rounds more like seed rounds.

But perhaps the most significant side effect is this: Because VC firms are more discriminating in where they direct their funds, wireless companies are forced to pay closer attention to fundamental elements of their business plans that previously had been glossed over. Like applications.

We think that what makes everything else important is the applications that drive it, Fong said. It's a simple equation: The carriers that don't understand the applications market simply don't get funding.

And the way investment firms see it, that's certainly not a bad thing. Closer scrutiny by the people holding the purse strings tends to raise the bar for wireless companies seeking to raise capital. Firms are actually doing due diligence for once, Dixon quipped. Imagine: these guys are actually spending a little time thoroughly investigating a business plan before raising millions of dollars.

A tighter funding market may help the industry by eliminating the companies whose business plans are mostly smoke and mirrors. As big events like Wireless 2001 tend to illustrate, there are still too many companies out there that have based their existence on vaporware and me-too business strategies. Maybe now the weeding-out process will actually start where it's supposed to start at the funding stage.

So if you're a start-up, you'd better have an airtight business plan backed by a solid understanding of the applications and services that will make it a reality. There are other ways of raising capital standing on a street corner with a cup in hand, for example but they're not recommended.

Contact Michael Hanley at mhanley@intertec.com