Northwest VCs See Existential Threat, and a Change in the Entrepreneurial Mindset

7/22/09Follow @xconomy

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on the financial statements of their portfolio companies. The emphasis, in the IT world, is now on finding ways to get a product on the market and boost revenue earlier in a company’s life, in order to slow the cash bleeding while product development continues, Dale says. “Get to market quick, and get paid, versus trying to perfect it first,” Gottesman says.

Animoto, a recent Madrona investment, is an example of what the firm is looking for in the current cash-constrained environment. The New York-based company has a product, and was profitable at the time it collected more capital for expansion, Gottesman says. Madrona was impressed by its “early customer traction,” as he put it. Same goes for Seattle-area startups Apptio, AdReady, and BuddyTV. “All of them are trying to do more with less,” Gottesman says.

The same cash-conservation ethic has spread to life sciences, even though the sector traditionally requires much more capital and longer product development timelines, Le says. VCs have gotten more serious about the “virtual” company model, in which a small group of core managers control a company’s IP and strategy, while outsourcing all kinds of essential tasks that require infrastructure and equipment, like animal testing. WRF participated in one of these investments, San Francisco-based Hyperion Therapeutics, which nabbed $60 million for late-stage drug development, even though the company only has about 10 employees, Le says. (Another recent virtual company hit, BiPar Sciences, was a big winner earlier this year for Paul Allen’s Vulcan Capital).

“People are now looking for more capital-efficient models,” Le says. “Gone are the days when you could raise $100 million and hope for a 4-to-6 time return.” Instead, biotech startups are looking to find ways to get partners to pay more of the R&D bills, until they can generate enough evidence their drug or device works, and that it can go on to win more venture funding.

All of this scrounging around for cash is having a psychological effect on entrepreneurs, and it may not all be bad for innovation from the sounds of it.

“The mindset of the entrepreneur has changed,” Gottesman says. “In IT, there’s more of a sense that you need to get to cash flow positive as quickly as possible. It’s a control-your-own-destiny mentality. That’s versus the attitude you might have seen in frothier times, which was that there’s always more money around the corner, so grow, grow, grow at all costs.”

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