Wall Street woes don’t stop startups

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Turmoil on Wall Street may have slowed lending, but it hasn’t stalled innovation among Washington-area startups. Just days after Lehman Brothers filed for bankruptcy last month and the Federal Reserve bailed out American International Group, Reston-based BrandClik officially opened its doors.

Co-founder Lowell Perry said he was confident that the text-based online advertising network would be successful, but he acknowledged the challenge of launching amid volatile economic times.

“Unfortunately, we didn’t know this all was coming down the pike,” said Mr. Perry, vice president of the 12-member firm.

BrandClik teams up with Web publishers and advertisers to make money from click-throughs of brand names.

The system tags a participating advertiser’s key words and creates links to Web sites of their choice. Content providers are then paid when readers click on the text.

The company, currently self-funded, is in talks with venture capital firms in hopes of securing between $2 million and $3 million in an initial round of financing.

Mr. Perry cited the benefits of BrandClik’s advertising system - in which advertisers can take advantage of their own trademarks, in contrast to other models such as Google Inc. that allow anyone to bid on a word - and continued growth in the sector, said he doesn’t foresee any problems getting funded.

“Online advertising been growing every quarter, every year, and this is really a way for advertisers to control their costs but also generate higher traffic to their Web site,” he said. Still, he noted that investors are being more cautious.

“Everyone right now is kind of counting their pennies and making sure things add up, whereas the dot-com boom of the 1990s it was, ‘You want to do e-mail? Great, here’s $20 million, go do it,’ ” he said.

Another Reston technology startup, Mpowerplayer, secured $2.5 million in Series A venture funding on Sept. 10, the week before the collapse of Lehman and AIG. Chief Executive Officer Michael Powers said the mobile gaming company is “in good shape” for the time being, though the credit crunch could impact future fundraising.

“If things go really bad, we may have trouble raising our B round, so I would really like to see what I could do to make the money last a bit,” he said.

Mr. Powers said the company, which makes merchandising software for mobile games, would not be as adversely impacted as other businesses during a downturn when consumers have less money in their pockets.

“If there’s some kind of recession or depression, people are still going to go to the movies, they’re still going to play games on their phones, so it may not hurt us,” he said.

Likewise, Heather Stouffer said her organic foods company, Mom Made Foods, has continued to grow “dramatically” in recent months, underscoring how certain markets are insulated from the downturn.

“I always tell other entrepreneurs, if there are areas that people are very committed to, it’s in children, pets, weddings, organics and green,” she said. “Our consumer is very committed to both nutrition and organics regardless of what’s happening to their family budgets.”

Her company markets frozen organic meals for children. After launching two years ago, self-funded Mom Made Foods can now be found in Whole Foods stores and Wegmans, she said, and soon, Super Targets.

By all accounts, the Washington area seems to have - at least so far - weathered the credit crisis that, according to the National Venture Capital Association, is dragging down the industry nationwide. The trade group cited only one public offering during the third quarter and less mergers and acquisitions activity.

“Should the current situation be prolonged into 2009, we can expect fewer new investments by the venture industry as they will need to spend their time with these later stage companies that are waiting to go public or be acquired,” Mark Heesen, NVCA president, said.

Dendy Young, chief executive officer of private equity firm McLean Capital LLC, said it’s simply too soon to gauge the impact of the market crisis in the D.C. region.

“It’s one of those situations where the pebble has dropped into the middle of the pond - in fact maybe it’s a rock - and we haven’t absorbed what’s happened yet. I think it’s going to take some number of months before we do,” said Mr. Young, a board member of the Northern Virginia Technology Council.

Mr. Young said it’s “business as usual” for his firm, whose average investment is usually between $1 million and $5 million.

“Now, if we were to do a leveraged transaction where we use bank financing for part of that, I’m not sure what’s going to happen,” he said. “Until somebody gets turned down [by a bank] and tells all his friends he’s been turned down, you’re not going to see much impact.”

Melissa Carrier, director of venture investments and social entrepreneurship at the Robert H. Smith School of Business’ Dingman Center for Entrepreneurship, said that “people become more entrepreneurial” during an economic downturn.

“I think part of it is people may lose jobs and they look for other opportunities,” said Ms. Carrier, adding that this particular downturn is unique. “In the past, we haven’t had the same credit crunch go along with the downturns, so the question that we talk about around here is whether or not the capital required for some startups is going to be there to allow people to fund their entrepreneurial endeavors.”

Fundraising also will be limited, as there are fewer companies going public and fewer opportunities for mergers and acquisitions, she said.

“That’s where I think the pullback is going to come. I think investors are going to scrutinize their opportunities more,” she said. “They’re going to be able to affect valuation and pricing in these deals to make sure they have the maximum result. Entrepreneurs should be prepared and brace for that.”

About the Author
Kara Rowland

Kara Rowland

Kara Rowland, White House reporter for The Washington Times, is a D.C.-area native. She graduated from the University of Virginia, where she studied American government and spent nearly all her waking hours working as managing editor of the Cavalier Daily, UVa.’s student newspaper.

Her interest in political reporting was piqued by an internship at Roll Call the summer before her ...

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