There are media-friendly ‘gurus’ who do not understand the basics of starting a business and then how to raise money to build it. Assumptions are made that money will always be made available for great ideas. Some extremely high profile names make comments like: ‘it’s the venture capitalists who will not put up the money; how can they let such a good idea go to the wall’. But could we please get real?
While the hype of the internet was still in vogue money was being raised – but at a price. A price which only now people are beginning to understand.
The truth of the situation is that in a boom economy the apparent pride of raising money to launch a business far outweighed considerations of the cost of such capital and the implied valuations attached to the business.
Some businesses were able to make it from seed or first round funding to later stages when the harsh reality returned. The sad fact is that a lot of early stage technology companies had taken on financing at an implied valuation that their revenues and cash flows certainly would never justify – if any one had done the correct analysis – during the hype and definitely not now that ‘traditional’ principles are back in the frame.
Exit options for investors have reduced – the equity markets are virtually shut – so investors are less willing to provide mezzanine finance to the sector. An example – Letsbuyit.com – has applied for bankruptcy protection with an Amsterdam court. This is despite a relatively strong Christmas period and progress toward achieving critical mass by passing the 1m members mark. On a more positive note for the sector, Yodlee.com, the account management service, just succeeded in securing a further US$50m of third round funding.
The game show ‘Who wants to be a millionaire?’ is closer to what was happening in February and March last year.
The sad fact is that ‘asking the audience’ doesn’t work all the time and perhaps phoning a friend would. There is more pain to come as the phoney valuations work their way through. The final answer is work with advisers who do the basics first.
- Clive Hyman is head of KPMG’s business incubation services, K-Incubator.
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