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For most, this is no time to be a startup company. Just last year, venture capitalists seemingly threw money at any idea that moved. In the first half of 2000, VCs backed 180 Washington, D.C., deals worth $2.5 billion. So far, 2001 has been much cooler, with the total value of all 78 D.C. metro area deals barely topping the $1 billion mark. The number of early stage and startup deals has dropped even more precipitously. But there are those who have figured out how to succeed in this market. Lawyers involved in several deals in the shaky post-boom market say that acquiring venture capital is a whole new game these days, especially for young companies. Securing financing involves more intensive planning, preparation, and a business plan built on something more than just another dot-com dream. “In previous years, both ‘nice to have’ and ‘need to have’ technologies were getting funded,” says Dean Rutley, a partner in Morgan, Lewis & Bockius’ Tysons Corner, Va., office who helped Chantilly, Va.’s Network Mantra win over private investors in February. “In the current climate, only ‘need to have’ technologies are being funded.” That change, he says, is one reason that lawyers are now “seen as a consigliere,” essentially taking on the role of business partners in order to properly prepare a company for presentations to VCs and angel investors, whether through face-to-face meetings orchestrated by counsel or at road shows where investors weigh pitches from several companies at once. And those investors are getting harder and harder to impress when it comes to funding for startup and early-stage companies, according to a quarterly report released this week by PricewaterhouseCoopers and Venture One. Out of about three dozen D.C. area deals completed in the second quarter of 2001, just 22 percent were for first-round financing. That percentage fell from the first quarter, when 37 percent of the 43 deals that went through were for first-round funds. But Network Mantra is not the only winner out there. Rockville, Md.-based biotech company Aptus Genomics completed a $6.2 million first round of financing at the start of the year. NavTrak.Net, a Salisbury, Md.-based vehicle-tracking company, found $2.5 million in financing by July, and expects the total to grow to $3.5 million with a first-round closing in September. Why their financing dreams panned out at a time when venture capitalists have been shying away from newer companies has as much to do with their management as their product, say their lawyers and others involved in emerging businesses. Investors want “top-flight management teams. That’s number one,” says Sean Murphy, of counsel at D.C.’s Patton Boggs and counsel to Aptus Genomics. “Number two, they’re looking for companies with growing markets that have a technology or some intellectual property that will allow them to dominate or hold a very strong position in a growing market.” Greenberg Traurig partner Harry Glazer, who moderated a panel at the Virginia-Israel Technology Trade Summit in Herndon, Va., a few weeks ago — where 15 companies made presentations to approximately 20 Virginia-based and Israeli investors — adds that a business plan that shows a realistic road to profitability is often not enough. “To get funding today, you need a rock, rock, rock-solid management team. The A management team is really AAA+ management today,” says Glazer. “They’re looking for track records.” A BIG BREAKFAST A track record is exactly what Gabriel Venture Partners, which has offices in Vienna, Va.; Silicon Valley; and Annapolis, Md., got when it agreed to back Network Mantra, a graduate of Falls Church’s eIncubator, which was set up in conjunction with the Fairfax County Economic Development Authority to help grow tech companies from the initial light-bulb idea through funding. Network Mantra co-founder and CEO Suri Bulusu had two decades of experience in information technology under his belt, working for companies like the Society for Worldwide Interbank Financial Telecommunications in Brussels and TIBCO/Teknekron Software Systems in New York. Others at the company hail from Verizon Communications, Ernst & Young, and Cisco Systems Inc. But Network Mantra’s executives made no assumptions about their ability to get financing, says Rutley of Morgan Lewis. Along with his firm’s director of client services, David Harvey, Rutley helped Network Mantra gain one of just five spots at an October 2000 Century Club Grubstake Breakfast. At the quarterly breakfasts, entrepreneurs get a chance to show their goods to a roomful of interested parties. Often, more than 200 people attend, with potential investors usually making up 20 percent to 30 percent of the crowd, says Judy Pearson, executive director of the event sponsor, the Century Club of George Mason University. As part of the preparation for the networking event, Harvey and Rutley reviewed Network Mantra’s business plan and coached them on their presentation. Harvey, a nonlawyer, spent much of his time last fall on Network Mantra business. Harvey’s role, Rutley explains, was the firm’s effort to offer “a dedicated person to help them in the process.” In addition, before seeking financing, Network Mantra had already developed a prototype of its network service management software, which is designed to help companies economize by automating processes that have been done manually. In the past, says Rutley, some firms did not spend much time on prefinancing work, confident in the easy manner that VCs were handing out money. “We always prepped the companies,” says Rutley. “Not all law firms were doing that. If the company looked like it had a decent business plan, they were funded. The irrational exuberance of ’98, ’99 has been replaced by the VCs coming back to their senses.” For Network Mantra, the close attention worked, with a number of investors showing immediate interest in the company’s software. Just two months after the breakfast, two investors had submitted term sheets for financing deals. The company closed on a round of financing led by Gabriel Venture Partners in February. Network Mantra officials have not disclosed the exact amount of the deal with Gabriel Venture Partners, but according to Century Club Executive Director Pearson, companies typically seek between $250,000 and $1 million at the breakfast. Following its first round of financing, Network Mantra has been busy testing its product with customers, seeking more clients, and hiring additional employees. Another beauty contest for venture capitalists may soon be coming up. “They will be looking for a Series B round before too long,” says Rutley. GETTING ON TRACK If startup NavTrak has its way, the financing round ending in September will mark both the start and the end of its foray into venture capital. The vehicle-tracking company, which was introduced directly to investors and did not participate in any formal networking events, has managed to put together $3.5 million in financing over the last few months, with Mt. Laurel, N.J.’s BaseCamp Ventures leading the charge. “That gets us to profitability,” says NavTrak CEO Ron Hodges. “What would change [the decision not to seek more investment] is if the business plan grows faster.” NavTrak’s technology, which Hodges says generally costs about $27.50 per month per vehicle, can tell a delivery company where its driver is at any given time, as well as information such as whether the temperature in the truck bed is low enough to prevent spoilage of perishable goods. The immediate ability to better manage their assets spoke to many of NavTrak’s blue-collar clients, who have already started using the product, says Hodges. “Even though we sound like we’re high-tech,” he says, “we’re really a nuts-and-bolts company.” It’s exactly this kind of straight line to profitability that venture capitalists like to hear about nowadays. “What they’re looking for is more manageable market risk,” says Michael Lincoln, a partner in the venture capital group in the Reston, Va., office of Palo Alto, Calif.’s Cooley Godward. But having a product, customers, and revenue all lined up before a company starts wooing VCs is “obviously a real challenge for many early-stage companies.” Piper Marbury Rudnick & Wolfe partner Ernest Stern, NavTrak’s attorney, agrees that VCs are looking for better established companies today, even in the infant and toddler stages of seeking financing. Being “further along … in terms of achieving its business plan,” he says, “I think is more important than ever.” And it can be well worth a firm’s time to make sure that a gestating company properly establishes its business plan and prepares for presentations to the deep pockets. “If they get a term sheet,” says Morgan Lewis’ Rutley, the law firm can then start performing more traditional legal services for that client, including negotiating the term sheet, setting up the corporation, and dealing with the company’s stocks. A HOT SECTOR While both Network Mantra and NavTrak made sure their business plans were well under way when they sought financing, some early-stage and startup companies are managing to win the game with just a bare plan in hand. These kinds of companies “tend to be in sectors that are still favored by investors and they tend to have seasoned management teams or well-known founders,” says Lincoln. As Rockville-based Zagros Networks’ attorney, Lincoln has seen the venture-financed startup jump from formation to incorporation to financing within six months. The company’s ability to obtain $6.3 million in financing in such a short time and without a fully established base of customers or revenue had a lot to do with the founders — Nariman Farvardin, who is the University of Maryland’s dean of the Clark School of Engineering, and three University of Maryland Ph.D.s — says Lincoln. With funds from Mohr, Davidow Ventures and Novak Biddle Venture Partners, both in McLean, Zagros’ founders are working to alleviate congestion on packet-switched networks used to transmit information, as well as video and voice data. Much like Zagros, Aptus Genomics found its roots in venture capital funding. “We were actually founded with involvement with venture capital,” says Aptus President and CEO Kevin Chance. “We had a lead investor already from our seed round” in October. The biotech firm raised $6.2 million in first-round financing during the first quarter of this year, which was led by Emerging Technology Partners. That followed a smaller-seed round last fall. Aptus, which focuses on developing pharmaceuticals to stop or slow diseases, has already filed patents on a number of genes. And while it’s hard to find a hot sector right now, “we’re seeing more life science companies get financing,” says Lincoln. Chance says the company is considering another round of financing, which reflects what the PricewaterhouseCoopers and Venture One numbers show and what practitioners already know: that venture capitalists have been focusing on nurturing their established portfolios, with new additions being added more slowly. “A lot of VCs stopped doing new deals,” says Morgan Lewis’ Rutley, “and started concentrating on saving the deals they’d already made.” As Rutley and others have seen firsthand, getting the attention of a VC for new money is hard, but it can be done. “Who’s got the leverage?” says Greenberg’s Glazer. “Before, it was the entrepreneurs. Today, the terms are very tough and venture capitalists control it. To get Series A, you have to be stellar.”

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