Digital Media Center Looks Ahead at Financing Scene for 2012

12/7/11Follow @jpruth

Investment bankers, entrepreneurs, and venture capitalists gathered Tuesday morning at the New York offices of accounting and consulting firm Deloitte near Bowling Green to listen to a panel discuss the financing outlook for technology startups in 2012. The event was the first to be presented by the Digital Media Center, a new group formed by Cooley, CTPartners, Deloitte, Nasdaq, and Silicon Valley Bank to bring together New York startups in the digital media sector with investors and other industry players.

Moderated by Dennis Kneale, senior media and technology correspondent for Fox Business Network, Tuesday’s panel spoke with cautious optimism about the sustainability of the funding scene as the New Year approaches. Kneale stirred up the discussion with questions about the value heaped on technology companies given the hype and scrutiny faced by the likes of  Groupon, Zynga, and Facebook.

Panelist John Lambros, managing director with investment banking firm GCA Savvian, took a positive stance regarding growth equity investments in 2012, though he tempered his enthusiasm. “It’s going to be good, not great,” he said. “I think the market is going to continue to support the growth in the digital media sector.” Fellow panelist Jonathan Sherry, co-founder of CB Insights, which provides information on venture capital and angel investor-backed startups, said venture capitalists are not raising funds at the same rate prior to the most recent run-up.

Sherry also said there were some unfounded concerns about investments made at the seed stage that drive up the number of deals numbers. “People are speculating whether or not this is a bubble,” he said. “It’s not too much to be concerned about. Seed deals may comprise 5-15 percent overall deal volume in a given quarter.” He said the dollar amount of such seed deals, however, represents 1-5 percent of the market. “Even if all these deals failed it would hardly make a dent in the financing market,” Sherry said. “The bubble talk is a little bit overhyped.”

Panelist Michael Jenkins, a vice president with Goldman Sachs, also had a positive outlook for 2012. “We’ve seen very, very good results in IPOs recently,” he said. “That will continue, barring instability.” However Jenkins said that the coming year will not be completely free of headaches. “It’s all about timing,” he said. “There are going to be horrible times in the market over the next 12 months, and there are going to be good solid times.” Jenkins said in spite of concerns at the macro level about the economy in Europe and China, companies—in general—are performing well. “The companies that are performing the best happen to be technology companies,” he said. “Investors are still very excited about growth.”

Jenkins said IPO valuations in the current market are typically grounded in more tangible factors than methods used during the Internet bubble of the late 1990s. In those days, some companies pointed to their webpage views and user clicks if they had little or no sales to backup their valuation, he said. “You get to the point where it’s ‘What’s your price per press release?’” Jenkins said. While technology companies today are attracting more attention, he said investors can see the potential for future profits based on their cost structures and growth. “Investors are saying. ‘I can invest in that company and I’m willing to take that ride to get there as long as I’m rewarded with a 20 or 30 percent return on investment,’” he said.

Lambros said that, especially in the New York market, there has been a huge uptick in angel financing of technology companies thanks in part to the relatively low cost structure and ability to grow a digital media business. “It doesn’t require a lot of capital,” he said. “Many of these companies are hugely capital efficient.” Lambros said angel investors seize such opportunities to get in early and put their money to work.

Sherry said while angel investors have been more engaged in the market of late, their presence has not trumped venture capitalists. “The barriers to entry for becoming an angel investor are much lower than they were in the past,” he said. He cited the AngelList website as bringing together potential investors with companies seeking funding. “That’s one example of how it’s become easier and easier to become an angel investor,” he said.

Sherry also sees room for the upswell of angel investors along with venture capitalists at different stages of startups’ growth. “Some of these companies are going to go on to raise their Series A,” he said. “Some of these companies may not need to raise more funding.” He also said some companies are content exiting in the $5 million-to-$25 million range. “That wouldn’t necessarily sustain what a venture capitalist is interested in, but it would sustain what an angel investor is interested in,” he said.

João-Pierre S. Ruth is the editor of Xconomy New York. He can be reached at jpruth@xconomy.com and followed on Twitter @jpruth. Follow @jpruth

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