Securing Financing - @ventures, Softbank Corp., Benchmark Capital, Impact Of The Dot.com Fallout On Venture Capital

All new companies need financing of some sort to launch operations. In some cases, entrepreneurs are able to simply dip into their existing personal savings accounts. For example, Jerry Greenberg and Stuart Moore, who co-founded Sapient Corp. in 1991, used $40,000 of their own savings and charged nearly $70,000 on their credit cards rather than seek outside funding for their new information technology (IT) consultancy. In other cases, entrepreneurs will ask a friend or relative for funding, as Gateway, Inc. founder Ted Waitt did in 1985, when he secured a $10,000 loan from his grandmother to establish his mail order computer business. Most often, though, new businesses will turn to outside sources such as banks and venture capital firms for startup funding. Because venture capital firms actually purchase a portion of the company they are funding, quite often they help to steer the firm's strategic development.

Funding for firms which have not yet launched operations is known as seed money or seed investing, while funding for fledgling upstarts that have already opened for business is called early stage investing. Banks and venture capitalists also loan money to established businesses seeking additional growth; this process is known as expansion stage financing. Wealthy individuals who fund startups are sometimes called angel investors. To gain access to outside funding, entrepreneurs typically submit some sort of a business plan, which details exactly how a new or existing company will accomplish goals like launching operations, finding customers, making money, and expanding into new markets. Typically, the most successful business plans, at least in terms of securing funding, are those with a clearly defined target market. In many cases, once officials at a bank or other funding institution determine that a business plan warrants further consideration, they expect the individuals requesting the funding to pitch their ideas in person as well. Many investors also favor startups with experienced management, a diverse and qualified board of directors, and an exit strategy, such as a planned initial public offering (IPO), which allows investors to cash out in three to five years, if desired.

In the U.S., securing financing proved an easier task than ever before for Internet-related startups in the mid-1990s as predictions of astronomical growth in e-commerce fueled what became commonly known as dot.com mania. In fact, many venture capital firms began to focus solely on Internet markets. For example, Internet Capital Group, founded in 1996, invested specifically in business-to-business (B2B) ventures, such as Internet Commerce Systems and VerticalNet. Dot.com incubators—firms that allowed startups to grow in-house before venturing out on their own—also began to emerge. One such operation, idealab!, eventually launched both eToys and eve.com. According to Coopers & Lybrand, venture capital firms invested roughly $6 billion in technology firms, including PointCast, Yahoo!, and Amazon.com, in 1996. This proved to be only the tip of the iceberg, however. According to BusinessWeek Online writer Peter Elstrom in an April 2001 article, "For years, venture capitalists declared their mission was to build rock-solid, sustainable businesses. They would seed startups with millions of dollars, betting that two out of ten would hit it big, and they would be richly rewarded. When Net mania hit, they abandoned that approach and began rushing companies onto the public market with the ink barely dry on the business plans." Through the late 1990s and early 2000s, three of the most active dot.com financiers proved to be Tokyo-based Softbank Corp.; Menlo Park, California-based Benchmark Capital; and Andover, Massachusetts-based CMGI, Inc., which created @Ventures to handle its venture capital operations.