Startup frenzy yields to natural selection.

• Author: Taylor, Mike
• Position: Money Matters

CHARLES DARWIN WOULD have appreciated how his theory of natural selection is working in the business world. But then, he never had to test it on his own startup.

The number of venture-backed companies eligible for Series B financing reached its highest level in history in 2001, as a VC funding frenzy led to a veritable baby boom of startups. Now most of these companies are experiencing the downside.

Consider this: Only 9 percent of all venture-backed companies eligible for second-round financing were able to secure funding in the third quarter of 2001, according to the San Francisco-based venture capital research firm VentureOne. As for the 91 percent that didn't secure second-round funding, many are just experiencing the harsh result of bad ideas or faulty business plans or inadequate teams.

But some potentially good companies will be lost with the bad, says Dan Mitchell, a founding partner of Sequel Venture Partners in Boulder. "There clearly will be companies that are good companies that won't make it just because of a lack of financing."

Brad Feld, managing director of Mobius Venture Capital (formerly Softbank Venture Capital) in Superior, says the scenario in Colorado is similar to the industrywide picture offered by VentureOne's research. The problem isn't a lack of VC money, but lack of VC time. "Most VCs have their hands full with their existing portfolios and consequently are not doing very many new investments," Feld says.

He cites himself as an example. "In 2000, I personally did around 15 new investments. In 2001, I only did two new investments. "This is typical of most VC firms; they have focused inward, are funding their existing companies, and are stretching the life of their funds back to normal lengths of time. "Historically, venture funds lasted three to five years. From 1998 to 2000, firms could use up a fund every 12 to 18 months."

Feld...