Newspaper article International New York Times

Start-Ups Find They Have to Work for Cash

Newspaper article International New York Times

Start-Ups Find They Have to Work for Cash

Article excerpt

Instead of venture capitalists begging to invest in start-ups, entrepreneurs are begging for cash, and potential investors are making demands.

When Jeremy Hitchcock raised money for his technology start-up in 2012, he barely had to break a sweat. He was flooded with emails from venture capitalists who wanted in. Two months after meeting an investor over cocktails at a technology conference, he scored $38 million.

But last year, as valuations of tech start-ups wobbled and public tech stocks gyrated, Mr. Hitchcock, 34, was faced with a different dynamic. As he tried to garner new capital for his company Dyn, which monitors and reroutes Internet traffic, potential investors peppered him with questions others had once glossed over. How would Dyn produce a return for them? Did Dyn have the size and scale to go public?

Dyn announced this month that it had raised $50 million from a private equity firm. But as part of the discussion, Mr. Hitchcock, who has not run a public company, agreed to step down as chief executive so Dyn could find a leader skilled in developing a business.

"The talks were much more thorough" with investors this time, he said, adding that he had been thinking about resigning as chief executive before the fund-raising round.

The balance of power is shifting across tech start-up land. Not long ago, entrepreneurs had the upper hand. With investors eager to get a piece of the next Uber or Airbnb, entrepreneurs often just lifted their little fingers to get financing. Some investors let the entrepreneurs choose their own terms, while others gave multimillion- dollar paydays to start-up founders long before their companies were a success.

Now investors have the advantage. Instead of venture capitalists begging to be allowed to invest, entrepreneurs are coming to them begging for cash. Investors are exerting their newfound power by asking more questions about a start-up's prospects and taking more time to invest. Some are pushing for management changes or for financing terms that would help cushion any losses they might face.

"Venture capitalists are putting founders through everything short of a proctology exam before they invest," said Venky Ganesan, a partner at Menlo Ventures, a Silicon Valley venture capital firm.

The changing balance of power is evident in the numbers. Venture capitalists have put less money into start-ups in the United States in the past two quarters, according to the National Venture Capital Association; funding dropped 11 percent to $12.1 billion in the first quarter from a year earlier. With a smaller capital pie, entrepreneurs have to work harder for a piece.

Investors have also been better able to negotiate financing terms that benefit them. According to a survey from the law firm Fenwick & West, investors of richly valued start-ups have been getting more provisions such as guaranteed payouts. …

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