Funding for consumer Internet companies is going away, says Kevin Rose of Digg
It stands to reason that cash-strapped startups will find raising money for expansion more difficult during the global economic slowdown.
So why not pair the most promising of these young businesses with more mature private companies that still have cash in their pockets?
Venture capitalists appear to be eying exactly this opportunity, convinced that “rolling up” several resource-starved businesses into a better capitalized one makes sense. They also reason that the larger, consolidated company will be more appealing to public market investors when the IPO window opens again.
Today’s environment appears to lend itself to these deals, agrees J. Sanford (Sandy) Miller, general partner at Institutional Venture Partners. “We like roll-ups for our existing portfolio companies.”
“We are prepared to help” when strong management teams are looking at roll-ups that make sense, Miller said.
Venture capitalists – including those at Sequoia – say that when young companies with promising product don’t have the resources to grow their businesses they are eager to review consolidation deals.
In today’s environment venture investors need to be prudent, Miller said. Funding large losses at startups for a sustained period of time is difficult, and Institutional Venture Partners is looking to get into companies with breakeven coming sooner rather than later, he said.
“We look for a more cautious plan,” Miller said. “People need to look hard at things such as burn rates.”
Money is indeed difficult to come by, said Kevin Rose, founder of the Web 2.0 site Digg. In particular, “funding for consumer Internet companies is going away, at least in the short term,” he said.
When financial stability returns and Wall Street investors begin to look for new public offerings they will look for companies with greater scale, says Miller.
