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Fax:Start-ups gird for a long haul
By Robert Weisman
The sputtering economy has changed the calculations of area start-up companies, prompting many to husband cash, revise strategies, stockpile more venture capital, and put plans to go public on hold.
With financial markets slumping, the number of initial public stock offerings is on track to hit a five-year low in the first quarter. Only nine have been priced since the start of the year nationally, and none in New England, compared with 62 in the nation and five in the region at this time last year, according to the Thomson Financial research house.
Nearly two dozen companies have withdrawn IPO registrations so far this year. So, venture-backed technology and life sciences firms, which typically aim to go public or be acquired in five to eight years, are resigning themselves to a longer slog. They are also getting used to streamlined products, cheaper hotels, and more judicious hiring.
"Most early-stage companies are concerned about a recession," said Daniel J. Nova, managing general partner at Highland Capital Partners in Lexington, a venture firm that bankrolls start-ups. "We're encouraging them to keep an eye on their spending and stretch their cash because things could be quiet in 2008."
That means that patience and frugality, virtues not usually associated with entrepreneurs, have become required traits for the early-stage companies that populate Route 128 and Kendall Square in Cambridge. Often in response to prodding by their venture backers, start-ups have been scaling back on first-class travel, eliminating outside recruiters for nonexecutive jobs, and reducing their "burn rate," a common measure of how quickly they run through their funding.
In addition to the dried-up IPO market, entrepreneurial companies and their backers expect a tougher market for acquisitions, the other favored strategy for cashing out their investments.
So-called "strategic" buyers, cash-rich companies such as Microsoft Corp., IBM Corp., and Bristol-Myers Squibb Co., continue to acquire start-ups to expand their product offerings. But private equity firms, a second category of buyers that previously vied for start-ups and drove up prices, have been largely sidelined by the credit crunch.
Leaders at Waltham's Black Duck Software Inc., which helps other businesses use open source computer applications, decided for the first time in January to give managers incentives for holding down travel and other expenses as part of their annual goals. "If you can save $50 on a hotel room or $20 on a rental car, those things matter," said Douglas A. Levin, the company's president and chief executive.
The six-year-old company, which eventually could be a takeover candidate itself, also determined that it would shop for small acquisitions in the short term to help diversify its services and grow to a scale that would be more attractive to larger technology companies.
A similar strategic reassessment at Archemix Corp., a Cambridge biotechnology firm that withdrew its IPO registration last month, has resulted in the company focusing its internal efforts strictly on a treatment for a rare blood disorder. It will "outlicense" technology it developed to treat more widespread diseases, such as acute coronary syndrome, to bigger companies with the resources to conduct larger and more costly clinical trials. Archemix will unveil its new strategy and disclose the start of a Phase 2 trial for its hematological treatment at the Cowen & Co. Health Care Conference in Boston today.
"We felt that, given the current market conditions, we couldn't realize the value we think Archemix is worth," said Errol De Souza, the company's president and chief executive. "From a business standpoint, this allows us to conserve our cash and focus on our sweet spot."
Other companies, worried it will become harder to raise later-stage rounds of venture capital if credit tightens further, are scrambling to negotiate new financing now or closing "insider rounds" with existing investors to tide them over until the economy improves.
"There's a lot of uncertainty out there right now," warned Robert B. Lamkin, venture partner in the Boston office of Germany's TVM Capital, citing a more challenging environment for start-ups selling enterprise software and related technology to financial firms and other business customers. "Sales cycles are lengthening, and you're seeing some big companies reevaluating their technology spending."
PermissionTV Inc., a three-year-old Waltham company that markets technology enabling businesses to host Internet video on their websites, added $6.5 million to an existing venture round late last year, boosting the total venture capital it raised to $24 million. "If the money's there, we'll take it, put it away," said Bob Lentz, chief executive of PermissionTV. "We're trying to give ourselves more of a runway."
The company also rolled out a "quick start" package to help would-be customers facing budget cuts to install a starter version of its video-hosting technology cheaply. "We know it's harder for all of our customers to get products launched," Lentz said. "So we're trying to make it easier for them to get through corporate hurdles."
For venture capitalists, who pride themselves on taking risks to fund leading-edge companies, reining in spending at their portfolio firms - or badgering them to hire more slowly based on incoming revenue rather than anticipated revenue - can be uncomfortable. "It's a pretty tough time to take a company public," conceded Terry McGuire, the managing general partner at Polaris Venture Partners in Waltham. "The advice that we've been giving to our companies is: Be mindful of your resources, but don't be super conservative. Build a great company. You have to go for it."
Still, many early-stage companies recognize that going for it may involve a longer process than they had initially anticipated.
"In today's market," said Mark D. Shooman, chief financial officer of BG Medicine Inc., a Waltham maker of molecular diagnostic products that withdrew its IPO registration in January, "it would be difficult to anticipate when the window is going to open and what the opportunities will be like to raise equity in the near future."
Robert Weisman can be reached at weisman@globe.com.
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