Friday, October 17, 2008

Stretching your dollar in the tech economy

Expansion funds in doubt, startups watch their cash flows

By Christopher Calnan

When Punchbowl Software Inc. temporarily needed more office space last week, CEO Matt Douglas figured he could save a few hundred dollars by putting an employee to work on a vacant lobby couch for the day.

Just a month after receiving $2.1 million in venture capital, Punchbowl’s cost-saving measure may seem a bit extreme, but with the credit crisis and a global economic downturn, Douglas acknowledges it may be the last outside funding the seven-person company sees for a while.

While some startup tech companies are thriving during the downturn, many others like Punchbowl, a 2-year-old online invitation company, are steeling themselves with tighter budgets to stretch existing capital.

Douglas likened the approach to the “Say uncle” game, where Punchbowl will continue to cut costs until they become operationally unbearable.

“We’re not saying ‘uncle’ until it really, really hurts,” he said. “We don’t need to take on additional expenses.”

Punchbowl investor Contour Venture Partners, a New York-based VC firm, led the Series A round of funding in mid-September, along with Intel Capital and the eCoast Angel Network.

The belt tightening at firms such as Punchbowl is being done in anticipation of an extended recession and a general slowdown in spending by consumers. When it will taper off is anyone’s guess, said Contour partner Bob Greene.

“The acute part of the crisis has just started, and no one knows how long it’s going to last,” he said.

New England technology stocks, which got off to a rocky start early this year, have taken another hit during the national downturn. The New England Tech Stock Index, which includes 181 publicly traded local tech companies tracked by Mass High Tech and Bentley University, slid to 60 this week compared with 90 a year ago.

Looking ahead, industry insiders say mature VC-backed companies will have trouble garnering expansion-stage funding while the initial public offering window remains shut.

Nationally, angel investments increased 4.2 percent during the first six months of the year compared with the same period last year. But Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire, expects both deal volume and deal sizes to drop slightly during the second half of the year, and that more angels will team up on deals to spread their risk.

“The angels will be there,” he said, “but the money they put in will have to last longer.”

John Egan, a partner and co-chairman of Boston law firm Goodwin Procter LLP’s technology group, expects early-stage companies to attract funding, but later round fundings that are largely dependent on debt financing may run into difficulties.

Meanwhile, companies have been busy closing deals before economic conditions worsen, Egan said. “People are trying to get things done,” he said.

Second Rotation Inc., a year-old Boston company that buys and resells electronics such as cell phones and laptops online, and Boston-based SwapTree Inc., the online bartering company, are reporting a boom — instead of doom and gloom — as a result of cash-strapped consumers looking for deals. National television news programs have been citing SwapTree as a way for consumers to save money during the recession, fueling “exploding” growth. The company plans to hire additional developers, CEO Greg Boesel said.

Second Rotation is hiring two additional employees and plans to hire three more before the end of the year, reaching 35 total, CEO Rousseau Aurelian said. The company is also planning to complete an $8 million Series B round of funding this month, after raising nearly $6 million earlier this year, he said.

Factors that include 100 percent growth rate during the third quarter compared with the second quarter, a solid revenue stream, environmental awareness and the constant creation of new products are insulating Second Rotation from the headaches felt by many other tech startups, Aurelian said.

“There’s a level of inertia in our business,” he said. “But we’re not smiling about it — we all have 401(k)s.”