For Initial Funding

From the Start

Lessons from the Dot-Com Bust

Corrections or additions?

This article by Kathleen McGinn Spring was prepared for the January 15, 2003 edition of U.S. 1 Newspaper. All rights reserved.

Capital Conference A Cold, Hard Look

An impressive line-up of venture capitalists, successful

tech entrepreneurs, and executives from New Jersey economic development

agencies and organizations speak and lead workshops at the New Jersey

Technology Council’s annual New Jersey Capital Conference, taking

place on Friday, January 24, at the Princeton Westin from 7:30 a.m.

through 2 p.m. Cost: $210, but $25 for full-time students. Call 856-787-9700

or register online at

The event begins with a breakfast sponsored by Sills Cummis Capital

Markets Group, followed by addresses by Maxine Ballen, founder

and president of NJTC, and by Caren Franzini, executive director,

the NJ Economic Development Authority.

Concurrent workshops at 9:15 a.m. address "Life After the A Round:

Issues and Solutions," moderated by Michael Weiner of Pepper

Hamilton, and "Taking Raw Technology to Market," moderated

by Victor Boyajian of Sills Cummis Capital Markets Group. Panelists

for the first workshop are Robert Chefitz of the NJTC Venture

Fund; Robert Burke of Teleogue; and William Howell of

Silicon Valley Bank. Speaking at the second workshop are Amir Goldman

of TL Ventures; Scott Grimes of Canaan Partners; and Inderpal

Mumick of Kirusa.

Concurrent workshops at 10:40 a.m. look at "Taking Advantage of

NJ Infrastructure," moderated by the NJEDA’s Franzini, and "Planning

a Profitable Exit Strategy," moderated by Steven Cohen of

Morgan Lewis. Panelists for the first workshop are Mary Hildebrand

of Goodwin Proctor; Randy Harmon of the NJ Small Business Development

Center Technology Commercialization Center/Newark; John Tesoriero

of the NJ Commission of Science and Technology; and Gina Boesch

of Stevens Technology Ventures Incubator. Panelists for the second

workshop are James Piazza of Deloitte & Touche; William Green

of Greenway Ventures; and Mike Mufson of Commerce Capital Markets.

Concurrent workshops at 11:45 a.m. take on "Venture Capital: What’s

Old is New Again," moderated by David Sorin of Hale and

Dorr’s Princeton office, and "Getting to the A Round," moderated

by Peter Ehrenberg of Lowenstein Sandler. Panelists for the

first workshop are James Gunton of the NJTC Venture Fund; Brendan

Dougher of PricewaterhouseCoopers; and Barbara Dalton of

Euclid SR Partners. Panelists for the second round are Anthony

Dimun of Nascent Enterprises, and Derek Lau of Worldscape.

The event concludes with a luncheon at which Mark Heesen, president

of the National Venture Capital Association, who speaks on "The

State of the VC Industry from a National and Local Perspective."

Top Of Page
For Initial Funding

There’s been a meltdown in the venture world," says Tony Dimun.

Nevertheless, he and a partner

jumped deep into venture waters just a year ago when they founded

Nascent Technologies, a Short Hills-based company that gets life science

start-ups up and running, in part by helping them to secure initial

venture financing.

Dimun speaks on "Getting to the A Round" on Friday, January

24 at 11:45 a.m. at the New Jersey Capital Conference. See above for


Dimun, who graduated from Rider University in 1965 with a degree in

accounting, went to work for large accounting firms, including Ernst

& Young, early in his career. A client was a Vital Signs (Nasdaq:

VITL), a young Totowa-based company involved in the design, manufacture,

and marketing of single-patient use products for the anesthesia, respiratory,

critical care, and emergency care markets. He joined the company in

1987, and became its CFO.

"Terry Wall was the founder," Dimun recounts, "he focused

on internal growth. I built through acquisitions." Dimun led Vital

Signs’ investment in five other medical device companies. He says

that identifying these companies and growing them gave him the experience

and confidence to launch his own venture. His success at Vital Signs

also provided him with the financial freedom to enter the exciting,

but risky, field of spotting and growing new tech companies. Records

of stock sale by Vital Signs insiders show he cashed in about $22

million worth of stock within the past two years.

At Nascent Enterprises, Dimun and Frank DeBernardis, his partner,

who has 30 years of marketing experience in the medical field, identify

promising life sciences companies just as they are emerging, often

from universities or hospitals. "Some," Dimun says, "are

barely beyond a concept, but others are about to be funded by venture

capital." The partners work with the start ups to identify market

opportunities, find a strong management team, look into manufacturing

possibilities, and find capital.

Nascent is working with about seven start ups. Its niche is medical

devices, blood products, and drug delivery systems. Ventures with

which it is working include a start up arising out of Rutgers that

is working on a polymer technology drug delivery system, and another

being formed by the chair of orthopedics at the University of Pennsylvania

that is being built around an electrical signal used to regenerate

cartilage and stop the advance of arthritis.

While advances like these stand to revolutionize medicine, finding

the capital to make them a reality is substantially more difficult

than it was just a few years ago when Dimun was launching the start

ups he identified during his tenure at Vital Signs. "The five

companies raised $75 million, maybe more," he recalls. "The

venture world was giddy with profits on the dot-coms." Then came

the dot-com bust, and the venture capital world changed.

"It isn’t a lack of money," Dimun says. "It’s just that

investors are extraordinarily more selective. They’re looking for

later stage, less risk." In the mid-1990s, he says, it didn’t

much matter whether a company had a product to sell. "There was

no resistance," he says of investors’ response to a good idea

with no product attached. Now investors want to see those products.

"Raising early stage money is extraordinarily difficult,"

he says. But it is not impossible. Here is his advice to those seeking

access to this funding:

Forget the venture funds, at least at first. Venture capital

funds, in most cases, will not now provide A round financing to untried

entrepreneurs with a good idea. Early stage start-ups need to look


Look to individuals. The dot-com bust was a disaster for

many, but others cashed out before the fall — and still others

stayed put in the executive suite of their corporations. These individuals

grew wealthy in the go-go 1990s, and at least some of them are willing

to get in on the excitement of launching a new venture. This group,

says Dimun, has taken the place of the venture funds that used to

be willing to take a flier on a new technology.

Stay with your industry. Dimun is helping the life science

companies he advises to raise capital by going to individuals who

are knowledgeable about the technologies these start-ups are developing.

He says he recently spent a great deal of time trying to sell a wealthy

retired IBM executive on a new medical technology company, but in

the end, his IBM contact just did not feel comfortable with the technology,

and decided not to invest. Far better, Dimun learned, to pitch an

investment in a medical device start-up to a retired senior J&J executive

who understands the field. Partners in health care venture funds who

do outside investing are also good targets, as are physicians.

In other industries the players will be different, but the strategy

is the same. Look for CEOs, retired executives, venture firm partners

— and maybe even 20-something neighbors with a dot-com past —

who know the industry, and the product niche, for which your technology

has applications.

Lean on your investors. An advantage of finding investors

in your industry — be it medical devices or wireless software

— is that they will be helpful later on. "They can open doors

to their former companies," Dimun points out. "They may have

contacts in Washington to help with the FDA. They may have contacts

in manufacturing."

Offer up a large playground. Once investors are identified,

it is important to show them that there is a huge market for your

technology. Says Dimun, "Investors want a large playground to

play in."

Be fresh, and safe. These wealthy individual investors

tend to be impressed by innovative, novel products that are well protected

by patents.

Show a quick route to market. Investors want to see a

clear route to the marketplace. It is not enough — especially

in the medical field — to demonstrate that a product can be up

and running quickly. In many cases, it is no good if a product takes

less than a year to invent, but two years to get through clinical

trials. Investors prefer technologies that, perhaps because there

is something similar on the market, can whisk through the FDA approval

process in a short time.

Still, there are no hard and fast rules. Says Dimun, "Many investors

have patience if the market is large enough to be rewarding."

Finding these investors is the key, and knowing the new rules for

spotting the elusive species is essential.

Top Of Page
From the Start

Plan the Exit

<B>Michael Mufson has ridden the investment banking

roller coaster for more than two decades, and his voice quickly betrays

the fun he finds in the ride. "I’ve survived 21 years," he

jokes, "I’m a zoo animal! They should put me behind bars."

Rather than being on display in a Darwinian case study of the jungle

that is the investment industry, Mufson is hard at work at his desk,

just a year-and-a-half into a new job. He left Janney Montgomery Scott

with 30 people to start Commerce Capital Markets, the investment banking

arm of Commerce Bancorp, the fast-growing, Cherry Hill-based regional


On Friday, January 24, at 10:40 a.m. he speaks on "Planning a

Profitable Exit Strategy" (See previous story for details.)

A graduate of George Washington University (Class of 1976), who also

holds an MBA from that school, Mufson speaks fondly of his entry into

the investment world. "I had the good fortune to start in 1981,"

he recounts. "It was a seminal year. The IPO markets picked up

after a 10-year lag." After laying dormant throughout the 1970s,

the stock market perked up as the 1980s began. "It was driven

by the PC, PC networking, and life sciences," Mufson recalls.

Investors were excited, and by and large they remained excited for

a good long time.

"It continued right up to April, 2000," Mufson says wistfully.

Sure, there was a little slowdown in the early-1990s, but then the

Internet came along, sparking even more than enthusiasm than the PC

did a decade earlier. "Now," says Mufson, "it’s pretty

ugly." The current slump is by far the longest downturn in his

professional career. "Previous downturns were six months, nine

months," he says. "Now it’s two years."

Can he predict the end?

There is no hesitation. "No," Mufson says right away. Part

of the problem is that there is no big "next thing" to rival

the PC or the Internet in his scan of the horizon. "It’s a bit

of a problem," he says. "There isn’t a tech event. You don’t

need a new PC every month; the Internet has calmed down." Life

sciences will be huge. "There will be tectonic plate shifts,"

says Mufson. "The life science community will change the way medicine

is practiced." But not yet. Not for a number of years. Practical

uses for the genome, for example, are a good decade away.

Another possible source of market-moving excitement is nanotechnology,

but there too practical applications are a still a good way down the

road. Meanwhile, Mufson says, "no one is buying green bananas."

This, of course, is a problem for the entrepreneur.

Investors want to put money into a promising venture, and then get

it out again — fast. The Initial Public Offering (IPO) allows

them to do just that. When the company in which they invest goes public,

cash inflow stops, and there is often a handsome reward. "For

the last decade, it was commonplace to take a company public,"

says Mufson. "Today, volume is off 75 percent."

But, while the profitable IPO exit door is largely shut, investors

still insist on getting their money out of a venture quickly. Mufson

says that three to five years is ideal, and that few investors will

wait around for more than seven years. With the IPO largely out of

the question, the best road to a pay-out often is a merger or acquisition.

This new reality affects the way entrepreneurs have to structure their

businesses, and how they have to approach venture capitalists. The

new reality for entrepreneurs are the following:

Planning for an exit. A new enterprise may be little more

than a patent in an entrepreneur’s pocket. No matter. You may have

no permanent offices and few employees, but you must have an exit

strategy — a way to cash in on the company that does not yet really

exist. Investors want to know how they are going to get their money

back, and when. As a practical matter in this market climate, that

generally means identifying companies — the more the better —

whose products could really use technology like that you are developing.

One such potential suitor will not excite investors, says Mufson.

Find a dozen, or better yet, two dozen.

Doing without investors for as long as possible. In the

old days, circa 1999, the idea was to pull in vast amounts of capital

well before an idea became a product. With an IPO a possibility within

a couple of years, there would be plenty of cash for the entrepreneur,

as well as for his investors. Now, with valuations for new tech ventures

down two-thirds, or more, it makes sense to hang on to as much of

the company as possible for as long as possible. The pay-off is not

going to be what it once was. If you want a decent slice, you need

to keep as much equity as you can.

Conserving cash. "Hold on to equity as long as possible,"

advises Mufson. The add-on venture rounds — $100 million here,

$50 million there — which were so common in the late-1990s, are

gone. That money has to last. "Don’t rent an expensive suite of

offices in Lawrenceville," says Mufson. Keep accouterments in

line with the company’s growth stage. Think twice about rewarding

salespeople with BMW convertibles. In short, he urges, "spend

money only when you need to."

Getting ready to get out. Not only do investors want their

money to get out of a new venture quickly, but they want the entrepreneur

and his lieutenants to be ready to clear out as well. "Funds are

suspicious of entrepreneurs who want to run the company," Mufson

says. In their view, the founder is the person who racks up 75 percent-a-year

growth in the first half decade or so. "Once it’s 20 to 25 percent

growth, the entrepreneur is not the best manager," says Mufson.

There is still money out there. Mufson says that, ironically,

this cash tends to be in the hands of venture funds that raised a

lot of money late in the boom cycle, and did not get their management

acts together in time to spend all of it on hot dot-coms. Getting

a share of that cash now is not easy, but it is possible. To catch

an investor’s eye now, says Mufson, forget the flash. Investors are

reluctant to spend any cash, and are drawn to promising start ups

with a similarly frugal style.

Top Of Page
Lessons from the Dot-Com Bust

Tech entrepreneurs in search of funding need to bring

that pie in the sky down to the table. "In this environment,"

says Inderpal Mumick, CEO of Kirusa, "you need to look at

technology that can be reduced to products in a short time." He

speaks on "Taking Raw Technology to Market" at the New Jersey

Technology Council’s New Jersey Capital Conference on Friday, January

24, at 9:35 a.m. (see previous article for details).

Though he started his company in the fall of 2000, just months after

a tech crash of historic proportions, Mumick has been able to attract

venture capital. A 1986 graduate of the Institute of Technology in

New Delhi, he spent 5 1/2 years at Stanford, obtaining a Ph.D. in

computer science and, he says, watching entrepreneurs all around him

turn ideas into well-funded companies. From Stanford, he went on to

AT&T, but his up-close look at business creation stayed with him.

"In a large company," he says, "it is hard to take things

to market. I had ideas, and the most appropriate, most expedient way

to bring them to market was to start my own company. It is also the

way to create wealth." Risk, he acknowledges, is part of the equation

too. He was willing to take that chance, and in 1997, he and several

AT&T colleagues founded Savera. He served as president of the Murray

Hill-based company, which is now part of international holding company

XYK. Savera builds, markets, and operates interconnect billing software

used for billing between telecommunications carriers for use of each

others networks.

Kirusa, Mumick’s current venture, aims to grow by making cell phones

user friendly. "Interface is a major problem for mobile devices,"

he says. Cell phones and their ilk now let users communicate visually

— typically by typing or using a stylus — or vocally, but

are not set up to enable the two to go on at the same time. Therein

lies the problem that is keeping mobile from reaching its potential.

"The visual way is very painful when the device is small,"

says Mumick. Taking the functions of a PC portable does not work well

when the keyboard is reduced to the size of a razor blade. The early

answer was to allow for speech. That works well, Mumick points out,

but only for some functions. "You can talk and get results,"

he says. "You can ask for a stock quote. You can say `read me

my E-mail.’"

But voice goes only so far in a mobile device. "Say you want directions

to Princeton," he gives as an example. "It’s painful to hear

back the directions. There are so many street names to remember! It

would be so much easier to see the directions on the device; it mimics

the experience of seeing them on paper."

Kirusa’s multi-modal technology combines the visual and the vocal,

letting each put its best foot forward. "We noted exactly the

point where visual is bad," he says. "That is the point where

vocal is good." And vice versa. "It’s almost an interlock,"

he says. This observation led Mumick and his team to develop technology

to enable the two to complement each other. Instant messaging is an

example of how this works. "You see a list of your IM buddies

on the cell phone," explains Mumick, "then you communicate

by speaking with them."

The technology is now being tested by two customers, France Telecom’s

Orange Wireless unit, and Bouygues Telecom. Both operate in Europe,

which, says Mumick, is about six to nine months ahead of North America

in spending money on cutting-edge wireless technology. "Italy,"

he comments, "has 60 million people and 54 million cell phones."

An advanced wireless infrastructure, along with a unified wireless

standard, makes Europe — and also Japan — excellent markets

for new wireless technology, but Kirusa is also forging relationships

with carriers in the United States and in Canada.

Mumick estimates the size of the market for multi-modal interfaces

for wireless devices at $2 billion in five years. Kirusa does have

competitors, large and small, but Mumick says his company is ahead

of the pack in terms of development and that, in any case, the market

is large enough for a number of players. Kirusa’s business plan calls

for collecting licensing fees for its technology from carriers based

upon the number of subscribers opting to use it. The first licenses,

Mumick says, may be for only 1,000 users, but fees will go up as more

subscribers sign on.

Kirusa has attracted $5.3 million in venture capital from France Telecom,

Deutsche Bank, and Silicon Alley Seed Investors. His advice to tech

entrepreneurs seeking to follow his success includes these suggestions:

Avoid the excesses of the dot-coms. So many promising

companies flamed out within the past few years. Observing the birth

— and demise — of these ventures, Mumick learned a number

of lessons. "Don’t overspend until you have customers bringing

money," is perhaps the most important. So many Internet companies

spent money on marketing, advertising, and amenities, he says. "They

grew too quickly, flew first class in the airplane, and stayed at

the Ritz. It was a waste of money."

Grow organically. Reminded of, the instant-delivery

company that brought magazines, Haagen-Daz, and even a single soda

to dedicated couch potatoes, Mumick comments, "They opened offices

in 10 cities before they had success in one." Better, in his view,

to let early successes feed gradual growth.

Define a clear niche. Another problem afflicting many

of the dot-coms was a tendency to buy other companies before getting

their own operations grounded., for example, put millions

into before it had moved very far past its own infancy.

Perfect a core technology. Tech ventures are built on

a technology. Entrepreneurs need to have experience in that technology,

and to know that it works.

Work with a customer as soon as possible. Once a technology

is developed, the entrepreneur needs to take it to a customer right

away. "Go and use it in a customer setting," says Mumick.

"See how it has to be improved, then fill the gaps that are relevant

to the customer. Do this very early on."

Technology in a vacuum is no good, he stresses. The customer’s needs

must be the development centerpiece for any entrepreneur who hopes

to take his idea to market.

Get to the software stage as quickly as possible. "You

can’t sell technology," Mumick says. "You can’t sell patent

rights. Maybe a big corporation can sell patent rights, but the start-up

can’t." You must make your technology into a product. It has to

be saleable. It has to fit into a customer’s environment.

The time when an investor would salivate over an idea is long

gone. "In this environment," Mumick stress, "investors

want technology that can be reduced to products in a very short time

— six to nine months, twelve months at the longest." Don’t

spend too much time tinkering with the recipe, that pie needs to baked

and placed on the windowsill as quickly as possible.

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