"It may be the best worst option that you have, because it at least creates an opportunity for the combined company to live a little bit longer, in hopes that either customer or capital markets open up again," says Ted Stone, managing principal of August Advisors, an investment bank specializing in the technology industry. "From an objective standpoint, though, it's not a very safe bet."

Given the current predicament of many VCs, however, "it's definitely a buyers' market, with valuations very depreciated," says Andrew Sherman, an attorney with McDermott, Will & Emery, which has advised on a number of such deals.

A few finance chiefs would agree. "There are fabulous opportunities out there," says Dan Kossmann, CFO of OutStart, an E-learning software company in Natick, Massachusetts.

This past July, his company relieved one of its VCs of a nonperforming portfolio company — at a discount to the $1.2 million in cash it received in exchange for stock. "It was a very clean acquisition — the VCs did everything from negotiating them out of leases to terminating employees to getting rid of the furniture," notes Kossmann. Plus, he was able to use the cash to acquire another capital-starved business that he believes could make OutStart profitable a quarter earlier than it had planned.

"No one knows when the market is going to open up again, but we are racing to build ourselves up into a company that could be listed on Nasdaq: $20+ million in revenues, profitable, with a nice growth rate," he says.

In Authentica's case, the infusion may also be working. The acquisition provided cash to crank up its marketing efforts, executives say, and to help the product fit the market better. Now, with more than $9 million of deals in the pipeline, Urbas says the company is on track to double its 2001 revenues this year and to turn profitable by the end of 2003.

Another benefit: the deal opened the door to more funding. The company closed a $4 million round with current VCs in September "just to give us a bit more of a buffer," says Urbas.

Alix Nyberg is a staff writer at CFO.

Buying To Mark Time

Some small deals engineered by venture firms in the past year.

*Merger
Source: Company press releases

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