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Access to Capital: Entrepreneurs Think Creatively to Weather the Recession

Access to Capital: Entrepreneurs Think Creatively to Weather the Recession

Jan 19, 2011

Securing startup financing has always been a challenging feat for entrepreneurs, but for those seeking to start a business following the Great Recession of 2008, scoring a term sheet has become astronomically tougher. The ripple effect of the recession has been felt by MIT graduates seeking to create new ventures around the world.  

Ryan Buckley, a 2009 graduate of the MIT Sloan School of Management, dreams of transforming Hollywood through Scripped, a free online screenwriting software package, but financing his business has been challenging. As result of the great recession, venture capitalists have shied away from new startups and have made investment opportunities in more mature companies the new norm.  This funding climate has left entrepreneurs like Buckley weathering the downturn through the support of friends and family.

“We’ve managed to raise angel money; we’ve raised $100,000 dollars in two years. The first round was family, second round was friends and family, and this round was just friends,” says Buckley. “We haven’t moved into venture capital. These people are like us, believe in what we are doing and aren’t phased by the fact that we still don’t have a revenue model.”

Venture capital firms have shifted their strategy of early stage investments in favor of less risky later-stage investments. According to this year’s Global Venture Capital Survey, 92 percent of 516 venture capitalists surveyed expect a reduction in the number of investments made since 2009. Of these, only 8 percent are planning on increasing the number of investments in the US.

“They are not going to take a chance like the run up to this, but there is money out there, for good businesses. I work with several investor networks and they are looking for good investments,” says Kathy Allen, a professor of entrepreneurship at the University of Southern California’s Marshall School of Business and an adviser to startups.

California has long been a center of entrepreneurship and innovation, but the economic crisis has forced entrepreneurs to reconsider the high cost of doing business in The Golden State.  Plagued with a $26 billion dollar budget deficit and some of the highest taxes in the country, many are looking beyond the borders of California for growth opportunities.

For Phil Sheu, focusing on Asia was key to the success of his company. Sheu, a 1994 graduate of MIT, is a co-founder of DeviceVM , which developed Splashtop, a software technology that can create an “instant-on” Internet experience for notebook computers.  Started three years ago with just five people, it now has over 200 employees spread across California and Asia. “For this piece of software to really proliferate, we wanted to be bundled on the PCs as they come out of the factory, so we wanted to work directly with the PC makers,” Sheu says. Taiwan-based companies make up 90% of the world’s notebook computers so it was natural for Sheu to set up offices in Taiwan to be closer to the computer makers and to lower costs.  In addition to venture capital funding from Silicon Valley, Sheu also received financing from executives at Taiwan-based computer makers. “It was a really strategic move to try to enlist those guys on our side, later on when we really wanted to extend our software offerings to all sorts of computer companies, those various investors from the IT industry helped bridge the connections for us.” The recession has reduced the volume forecast for Splashtop, but Sheu remains optimistic about future growth.

“The volume forecast really dropped a lot in the US.  In other regions, in the rest of Americas and in China, it’s still very healthy,” says Sheu.  “The potential market is still really big, and the PC market is about 300 million units last year worldwide. We are hoping to have our software on 10% of that by end of this year. Right now we are probably 1%, so there is huge room for us to grow.”

Despite the high cost of doing business in challenging economic times, Buckley also remains optimistic as the climate has presented new unforeseen opportunities for Scripped. “We are near or at the bottom rung as far as cost goes and our products are already positioned there prior to the economic downturn. Since the economy has flattened out, if anything, our products have become more attractive.”

Beyond that, Buckley is offering his services to other startups to stay afloat. “I’ve seen startups bootstrap by consulting on the side, that’s essentially what we’ve done. Two of our partners do work for other startups doing web development and design. So our CEO works full time for Applied Materials. Two of us now are freelancing doing other startups on the side.” And that is precisely the flexibility that entrepreneurs need to adapt in order to weather the recession. “Businesses have to learn how to stay flexible and can’t be so burdened by overhead and debt that they can’t survive the downtime,” Allen says.