VCs Flush with Cash, but Fussy

By: Natalie Canavor
Long Island Business News
October 30, 2003

STONY BROOK - When J.P. Michel began looking for venture capital a few years ago to grow his new software services company, Cognit Enterprises, he was met with enthusiasm, but no suitable deal.

Three venture capitalists had money available, but they wanted so much control that "we wouldn't be able to carry out our company vision," Michel said.

They insisted, for example, that he broaden his market beyond the insurance industry Cognit was targeting. And they wanted the company to take on business managers who, though experienced, knew little about that industry, Michel said.

The basic problem, according to corporate attorney Ira Halperin, of Meltzer, Lippe & Goldstein, is that once-burned venture capital firms have raised the bar for investment standards.

"VC is willing, but requirements have gotten constrained and difficult - they've upped the mark for where they'll put the money."

Many of the requirements make good sense to all sides. A great product or service is a given, and a company must also have a sound business plan, experienced management, and developed marketing strategy. But after riding dot-com companies down to the bottom, today's venture capitalists generally look for the promise of significant returns with minimal risk. And they often require that the company already be making money.

Investments that fit the bill, venture capitalists said, can be few and far between. Venture capital groups say they have plenty of money to invest and would prefer to put it to work on Long Island - if only they could uncover promising companies.

Barry Rubenstein, of Wheatley Partners in Great Neck, noted that his organization, which has invested in several Long Island high tech companies, recently received almost $50 million in state pension fund money to invest and has earmarked much of it for the Island.

"We have checks to write and we're going out to look at things," Rubenstein said. "But we don't see a lot of opportunities right now."

"There's a lot of un-invested capital at venture firms looking for a home," agreed Hal Wilson of Northwood Ventures, based in Syosset. "And while venture capitalists will invest wherever they find attractive opportunities, we would much rather invest in Long Island than get on a plane to go cross the country."

And so Michel's Cognit Enterprises, part of the Long Island High Technology Incubator at Stony Brook, chose to make its way as a founder-financed startup. "The easier route would have been to get the investment money," Michel said, "but not at the price."

Dozens of other promising high-tech startups on Long Island are also "finding it very difficult to find funding today to grow," said Carl Hanes, manager of the LIHTI at Stony Brook, where Cognit is based.

"At one point almost anyone with a concept could get money," recalls Hanes. "Hardly a week went by without one or more VC groups showing up at the incubator to kick the tires, wanting to put on a program to interest tenants," added Hanes. "We don't see that anymore."

For Rick Balfour, whose Balfour Technologies at the LISTnet High Tech Incubator at Briarcliffe College in Bethpage is developing 4D interactive visuals, the requirements of VC firms feel like a Catch 22.

When he began looking for funding two years ago, he found "it's not difficult to excite people about the technology, but everyone was looking for traction - an established revenue stream. So we've spent the last few years getting traction to attract growth-stage funding. But once you have the revenue stream, you may not need the funding."

Is there any consolation for area startups?

Not much, except that tight money for business development is not just a Long Island problem, but a national one. "Venture capital money nationwide is funding almost no startup companies," said Dick Lippe, senior partner at Meltzer Lippe and chairman of LISTnet's VC committee.

Furthermore, a recent survey by the Center for Venture Research reported that angel investment (financing via private individuals usually under the $1 million range) declined in 2002 to half the 2001 level.