CED in the News, 2001

Techs on hunt for venture capital

Heady, free-spending days may be over, but a "sense of realism" keeps investments coming, say firms at Chapel Hill conference

By ANNE FAWCETT

Reprinted with permission from the The Herald-Sun

Thursday, November 08, 2001

Doug Schiff and his business partners watched in amazement in recent years as companies placed other priorities above the bottom line.

"We've always been based on a real product with revenue streams and profit as goals," said Schiff, a vice president with 3rdTech Inc., a Chapel Hill-based incubator that takes technology out of UNC's labs and puts it on the market.

One of Schiff's hits is the NanoManipulator, a virtual reality device that allows scientists and engineers to interact with objects on the atomic level. He's already sold one $85,000 machine and software package to the National Aeronautic and Space Administration.

The key to successful product development is knowing what customers want and need, he said.

"We developed a real product we knew would have immediate customers to get it out the door," he said.

Last week, Schiff and hundreds of other entrepreneurs were on the hunt for venture capital at the Council for Entrepreneurial Development's InfoTech 2001 conference in Chapel Hill, which drew 850 people representing more than 300 companies.

The days of free-spending, free-wheeling business practices in the tech industry are over, but that doesn't mean the sector is beyond repair. Venture capitalists and entrepreneurs say there's still plenty to be optimistic about for companies with solid business plans.

"This is a fantastic time to be making investments," Bill Helman, a partner with venture capital firm Greylock, told entrepreneurs at InfoTech. "The most important thing is that a sense of realism has come back into the way people think about business."

The market for venture capital investment has slowed considerably, but the amount of money available is still substantial.

Venture capitalists invested a total of $235.25 million into 24 Research Triangle-based companies in the first quarter of 2001, down from $296.6 million over the same period last year, according to the Center for Entrepreneurial Development, a Research Triangle Park-based organization.

Nationally, venture capital investment totals about $40 billion for 2001. That's down from $100 billion in 2000, but it's still twice as much as the venture capital investment in 1998, said Mike Brooks, a partner with venture capital firm Venrock Associates.

Helman and his colleagues emphasized that startup companies should not take venture capital for granted and should show milestones by which their success can be measured.

"Companies lost discipline [from 1998 to 2000]," Brooks said. "They assumed another $50 million was around the bend. We've got to see rational business plans."

That's old news to Henry Kaestner, chief executive of Durham-based Bandwidth.com, which acts as a broker for broadband technology. Corporate customers can work through the company to purchase T1, T3 or other high-speed Internet connections from companies such as AT&T and Qwest for the best possible rates, Kaestner said.

He has watched revenues for the 10-month-old company rise steadily from $389,000 in April to $1.2 million last month.

"We're a dot-com at a time when dot-coms are a four-letter word," Kaestner said. "Not only that, but we're in telecom, which is the worst possible combination. We take a lot of pride that, in spite of that, we're very successful."

Bandwidth.com has recognized its niche as a bandwidth broker and resisted the urge to offer its own brand of T1 service, Kaestner said. Being overly ambitious caused the demise of many an Internet service provider in the late 1990s, he said.

"We haven't needed to invest a tremendous amount of money to install a fiber-optic market," he said. "Venture capitalists want to see a business model that's seeing real revenues month after month."

That's what MercuryMD found out. After producing revenue for about six months, the Durham company recently secured $4.5 million in venture capital for its second round of funding. The product: a system that consolidates computerized information throughout a hospital's databases and beams it to doctors' palm computers.

The company was incorporated in June 2000 and its system already is in about 20 hospitals, said Chief Executive Alan Ying, a former resident at Duke University Medical Center who left his physician training to lead the company.

The company's strong business plan has spurred satisfactory growth, Ying said.

"In the nuclear winter that startups are experiencing, it's been good to do OK," he said. Nanotechnology, wireless technology and bioinformatics are some of the more intriguing sectors emerging, said Brooks, who works out of Venrock's New York office.

And it's key to developing technology targeted to consumers' problems, he said.

"Are we really solving the problems that people have, or is the technology nice to have?" he asked.

The government of Botswana has decided that technology developed by Durham's TherapyEdge is a must-have.

CEO Bruce McCreedy recently returned from the country, where his company's Internet-based database will become part of Botswana's national AIDS/HIV treatment program, helping guide physicians who have sudden access to AIDS drugs and little experience in how to prescribe them.

"We're very pleased they looked at all the systems in the world and picked us," he said.

McCreedy's product, TherapyEdge HIV, has an artificial intelligence engine that proposes drug regimens based on a patient's test results, other medications and virus levels.

The product has the potential to be revolutionary for doctors trying to decide how best to treat their patients, McCreedy said. A similar service for cancer is in the pipeline.

It's important to look forward positively without assuming that the economy will be the same over the next six months as it was over the past half year, said Helman, who works out of Greylock's Boston office.

That's Bandwidth.com's plan. The company is beginning a fund-raising tour of angel investors and venture capital firms that, if successful, will allow for an even more aggressive growth plan.

"We've had a solid business model from the get-go, we'll be profitable every month going forward and we'll increase sales," said Kaestner, who became the company's CEO following a merger in January.

"Hopefully, we'll live happily ever after."