Opportunistic VCs dig for deals
With the economic downturn, so-called "Vulture capitalists" are snapping up Internet companies for pennies on the dollar. Plurimi, a San Francisco company that makes Web-based electricity monitoring products, was recently a target.
"They have first-rate management, with the right technology at the right time in the right place, but they cant raise the $1 million they need because all the investors in California are so shell-shocked," said Eric Janszen, a principal at Osborne Capital, a seed round investor in Plurimi. So, "bottom feeders" in New York offered Plurimi a loan on the basis of 100 percent ownership should the company fail.
Jason Ambrose, Plurimis co-founder and chief executive, turned the offer down and said he hopes to raise $6 million to $8 million in equity financing from energy corporations and outside the traditional Silicon Valley VC community.
"They are providing the money at risks that no one is willing to accept," Janszen said of the opportunists. "On the other hand, you could say that about a loan shark."
David Perez, founder and president of Lumina Americas, a consultancy that builds Internet marketing capabilities for firms targeting the Latin American consumer, said it took four to five months to raise $25 million from top-tier venture firms such as JP Morgan. In 1999, he said, it took only six weeks to garner $15 million.
Perez said he talked with vulture capitalists but shunned them because of the control they sought, the low valuations they offered and the performance requirements and penalties they demanded.
Eco Associates, in Austin, Texas, shrugs off the vulture capitalist name. "We dont take this personally," said Joe Allen, a spokesman at Eco. The company has $100 million to invest in 10 to 12 distressed dot-com firms and so far has invested $40 million in six companies: Chipshot.com, Drkoop.com, Exoplex, Mall.com, Outback Data Systems and Urban Box Office Network, which is in bankruptcy.
Eco is buying in at very low prices. "We take majority stakes for a few cents on the dollar," Allen admitted.
Valuations of privately held companies are down 25 percent to 75 percent, particularly if the companies raised money in 1999, said Alex Rosen, a general partner at Sprout Capital, which is not a vulture investor.
Stan Tims, a general partner at TL Ventures, which just raised $685 million in a new fund, said companies with $20 million valuations are lucky to be priced at $8 million. Terms are tightening. "Funds are being released in [serial groupings], and if a company does not hit a benchmark, checks are not being written," he said. "Occasionally, we drop in our own people to get them on the right footing."
Al Wasserberger, president and CEO of Spirian Technologies, which just raised $7 million, said that if he had done the deal 90 to 120 days earlier, he would have gotten a valuation on his company "three to four times higher" than the current one, which he called fair.