Photon02 news - Monday

03 Sep 2002

Today at Photon02, delegates heard that start-ups face odds of thousands to one on being successful.

The odds on winning seed or early round funding are getting lower and lower as venture capitalists (VCs) play it safe in the current market. That's the general consensus from speakers at the Starting up in Optics seminar held at Photon 02 in Cardiff, UK today.

"Business plans have a 1 in 4000 chance of leading to a company that is acquired or has an IPO," explained Steve Harmston, director of european research at VentureOne. "Out of 100 business plans that we receive, we typically look at one. From here, one in ten gets funded and only one in four is successful."

And with VCs receiving some 40 to 50 business plans per week, this amounts to a slim chance of success. With profit being the primary goal, VCs are also acting increasingly cautiously as the market downturn continues.

During the second quarter of 2002, VentureOne invested EURO 100 million into 17 communication companies. This compares to an investment of EURO 1100 million in the same quarter some 24 months earlier.

According to Harmston, VCs are now more likely to fund a second or later round of funding. "In Q2 2002, seed and first round funding accounting for less than 40% of our investments," he said. "Twenty-four months earlier this was up to 70%."

There is also a shift in the types of companies that receive funding. "Funding into healthcare is increasing," commented Harmston. "VCs tend to call this 'deeper technologies'. It's something more tangible and real."

And it is these telecommunication alternatives that VCs are looking towards for making a return. Business angel and former CEO of Kymata Brendan Hyland told delegates: "VCs are more likely to get IPOs from medical, displays and defence companies in 2003 to 2006."

Speakers agreed that the IPO market, when a company goes from being private to public and begins trading on the stock market, will not come back for 18 to 24 months.

"The 1998 to 2000 boom is over," said Hyland. "Telecoms start-ups are unlikely to be profitable till 2005 and the best companies are unlikely to IPO until 2007. If you can't get into a positive cash flow soon, you should think about cashing out now and starting again when things return."

Author
Jacqueline Hewett is news reporter on Optics.org and Opto & Laser Europe magazine.