Internet invaders
Philadelphia Business Journal - by Peter Key Staff Writer
Internet mania is about to sweep the serene and stately grounds of Longwood Gardens and the DuPont Country Club.
Early Stage East '99 will hold its opening ceremonies at the Kennett Square horticultural haven the evening of June 14 as a prelude to a day of presentations and exhibits by companies seeking their first round of equity funding.
The venture fair was a success last year, the first in which it targeted young businesses. And its organizers expect it to be even bigger this year, as more than 150 investors search for the next VerticalNet among the 24 companies that will be making presentations and 18 that will showcase their stuff.
"The message to people who want to [attend] ... the fair is they've got to do it right away," said Joseph Killackey, managing director of Center City-based DVCRF Ventures, who is co-chairing the event with Steven Hobman, a senior vice president with Blue Bell-based Progress Bank.
Those who want to do that can visit the fair's Web site at http://www.earlystageeast. org.
The reason for all the brouhaha? The incredible valuations attained by Internet companies such as VerticalNet, the Horsham-based operator of groups of industry-specific Web sites, which went public at $16 a share earlier this year and was trading around $90 earlier this week.
"You see a success story like that in this region and people say, `Hey, geez, this is something we want to look at,'" Killackey said.
It's also something entrepreneurs want to emulate, and more than a few at the fair are trying.
Fair organizers won't release the names of the presenting and exhibiting companies until the event, but Killackey said close to half have business models that involve the Internet.
Funding for those types of companies exploded in the first quarter of this year, according to the most recent PricewaterhouseCoopers Money Tree survey of venture-backed investments. Internet-related companies received $1.84 billion in venture funding in the first quarter, more than triple the $501 million they received in the same quarter of last year. The number of Internet companies funded more than doubled to 236 from 114.
"The Internet has the fastest growth rate of any category we've ever tracked in the survey," James D. Atwell, managing partner of the Venture Capital Practice in PricewaterhouseCoopers' Global Technology Industry Group, said in a press release summarizing the survey.
Perhaps because of the short time many Internet companies have taken to go from gestation to initial public offering, funding for young companies is up, too. Of the 722 companies funded in the quarter, 44 percent were start-ups or early-stage firms. That category led all categories in funding with $1.65 billion, which was 39 percent of the $4.29 billion invested during the quarter.
Despite that, Hobman said Early Stage East is the only venture fair he knows of for companies in the pre-funding stage.
Prior to last year, the fair was for Delaware companies of any stage of development that were looking for equity funding. But David Freschman of the Delaware Innovation Fund decided to change the focus to early-stage companies and expand the geographic area to the Eastern Seaboard from Boston to North Carolina.
The result was "a great event," said Ash Lilani, a senior vice president with Silicon Valley Bank, which has been lending to Philadelphia-area companies from its Maryland office. "Not only was it well organized, but the quality of companies was incredible."
The process for selecting the presenters and exhibitors may have had something to do with that. Hobman said it begins with nominations from professional and nonprofit support organizations that work with entrepreneurs, as well as venture capitalists. Nominated companies are asked to submit business plans and about half do. Those are then culled to find the companies that present and exhibit at the fair. This year, about 200 companies were nominated and from 80 to 100 submitted business plans.
Those that didn't submit business plans were missing the boat, according to Anthony Wedo, chairman of Homes For Living Inc., a Wilmington-based seller of home-decor items that received more than $1 million in funding within 90 days of exhibiting at last year's fair.
"This is the show to be at for small businesses," Wedo said.
Wedo said companies shouldn't expect to get funded at the fair, or even as soon after it as his did. Instead, he said, they should go with the idea of meeting a lot of possible financiers that they contact afterwards.
They also should look for more from a funding source than just money. They should make sure the funder shares their objectives for their business.
"Companies should expect if they're looking to raise equity that they're taking on a partner and creating a marriage that is one they're going to have to live with for a very long period of time," Hobman said.
Additionally, early-stage companies should expect funders to want higher returns than they would from deals involving more established businesses. The Internet frenzy and ongoing bull market also have boosted the returns expected by early-stage business financiers, but those factors have increased the valuations that entrepreneurs can have placed on their start-ups, too.
As for term of investment, Hobman said investors generally want to be able to get out of a startup in five to seven years, unless the company is an Internet business.
"There," he said, "the expectations are to see exit strategies a lot quicker than five years."
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