VideoLike many talented entrepreneurs, Henry White is a serial founder. Still only 41, White has already been involved in four start-ups. The first was profitably sold. The second was melded into a roll-up. The third grew to $100 million in annual sales before White moved on.
The fourth sounded as promising as any of these. Salisbury, Massachusetts-based PlumRiver Technology Inc. produced online software and services that consumer-goods manufacturers could harness to drive sales to retailers of footwear, sporting goods, and apparel.
To support it through the three years after its 1999 founding, PlumRiver received $7 million in two rounds of financing and a succession of short-term drafts, from lead financier Venture Investment Management Co. LLC (Vimac), a Boston-based venture-capital firm, and first-round investor Richemont International. In mid-2002, White had what seemed a likely commercial breakthrough — a deal with a prominent manufacturer that promised to prime cash flow. Nonetheless, that same week, driven by the sour economy, Vimac lopped PlumRiver from its portfolio. White is now a consultant — the title of choice among similarly bright but out-of-work entrepreneurs. "Up to early 2002, [Vimac was] in the mode of keeping companies alive," he says wistfully.
You could say PlumRiver fell victim to a poor choice of market. The three vertical segments it chose to serve — shoes, outdoor apparel, and sporting goods — are notably conservative when it comes to adopting new technology. But, just as surely, it is also the victim of a deteriorating economy and the post-dot-com dwindling of VC returns, one of many promising early-stage undertakings crippled by a withdrawal of capital sponsorship.
The Shrinking Venture Capital Pool
As annual returns slipped perilously in 2002, many VC firms pulled in their horns. According to a PricewaterhouseCoopers-Venture Economics-NVCA MoneyTree survey, between 1999 and 2002, expansion-stage investment by the nation's 750-odd VC firms shrank some 60 percent — from $30.8 billion to $13.3 billion.
Apart from yanking the financing from the PlumRivers of the world, some VCs gave up the ghost entirely, while others variously reduced staff, slashed the size of their working funds, cleansed their portfolio companies of cash drainers, and revamped their investment philosophies away from early-stage investments and toward putatively safer later-stage ones. Among the departed, ironically, was Barksdale Group, led by Jim Barksdale, former CEO of prominently venture-backed Netscape; the group shut down after only four years. Charles River Ventures sliced its latest fund by a massive 63 percent, from $1.2 billion to $450 million.
Another practice undertaken by VC firms to insulate themselves from harsh economic realities has been to place laggard portfolio companies into hibernation by doling out capital in life-supporting trickles. Investors were placing their portfolio companies "in sustained-growth mode," summed up VentureOne head of research John Gabbert, "raising enough to continue operations, but not gearing up for an immediate IPO or acquisition."
Such was the case with Cambridge, Massachusetts-based emerging-growth-specialist Zero Stage Capital and its Web property, FurnitureFan. An online guide to branded furniture carried in retail stores, FurnitureFan received its initial round in 1999, and its third — and so far last — in March 2001. The latter, some $4.1 million, was intended to carry the company to the end of that year, by which time it was expected to reach self-sustaining profitability. Instead, FurnitureFan passed all of 2002 and at least some of 2003 essentially going nowhere.
A typical tale of the times, FurnitureFan's adventure started in 2000, when Zero Stage hired Mitchell Russo, an experienced, 48-year-old entrepreneur, to take over as CEO and rework the company's failing business plan. Russo proceeded to design so resourceful an approach to furniture promotion and sales over the Internet that Zero Stage contributed its third round of capital despite the concurrent collapse of the dot-coms. Russo spent the money building credibility within his market and developing a revenue base.
But the company fell short of positive cash flow and was unable to secure the follow-up financing that would have constituted its fourth, or Series C, round. With valuations rocketing south, Zero Stage was stuck with its not-there-yet charge. Like PlumRiver, FurnitureFan had fallen prey to the bad economy and a niche — the furniture trade — that is resistant to change.
With revenue arrested at about $1 million, Zero Stage directed Russo to prune his management team and reduce expenses, thus forcing the operation into dormancy. "We weren't given the resources to move forward. We were held back from expanding," Russo says — but not ungratefully. "At least we have cooperative investors who understand what we are doing, and support it. If they can just keep us alive during this period of terrible business, when business does pick up," he anticipates, "we'll emerge as being quite valuable."
But how long will his financier keep slipping Russo walking-around money? "As long as he keeps creating value, and as long as our funds have the capital, we'll fill in the gap between his revenues and his cost," Zero Stage managing director Bic Stevens pledges. "We told all our companies, even those with lots of cash, 'Don't plan on getting any outside new financing, cut your burn rate, do things smarter.'"
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