Investment funds tougher to obtain
But investors find funding requests more complete and showing more promise.
All companies reach for the top, but first they have to get off the ground, often by raising money from investors.
That's harder to do in the worst economic downturn since the 1950s, but it is still happening.
And the situation is not all bad.
"You have less annoying competition," said Brent Matzelle, chief executive officer of Vuzit L.L.C., a start-up based at the University City Science Center in West Philadelphia.
Matzelle was referring to a noticeable decline in would-be competitors who put up fancy-looking Web sites that prompt potential investors in Vuzit to question its business plan.
"That's kind of positive," said Matzelle, who founded Vuzit, which has an online document-viewing technology, and late last year raised $350,000 for the company from so-called angel investors that supply money and expertise to early-stage companies before larger venture capital firms step in.
Vuzit's success in raising money showed that angel investors remain active, but observers of the local start-up scene said stock market wounds had made angel investors much more cautious and caused them to take longer to close deals.
From the investor perspective, there is also good news, in the form of applications for funding that are more thorough and show more promise.
"I think it's more difficult to raise money right now, so you tend to weed out some of the companies that have less quality business plans or less quality management teams," said John Moore, managing partner at Robin Hood Ventures, of Wayne, which invested less than $100,000 in Vuzit.
While many investors are licking their wounds, leaving some otherwise promising companies holding an empty bag, others are joining the fray.
Katherine O'Neill, executive director of the Jumpstart NJ Angel Network, said the Mount Laurel technology-investing group added three new members last month, bringing membership to 40.
New funds are also being launched. The Mid-Atlantic Angel Group, of Philadelphia, for example, raised a new $4 million fund in April, said founder and executive director Chris Starr.
This spring, the Mid-Atlantic Angel Group agreed to invest in ListenLogic L.L.C., a Fort Washington technology company that is developing services that monitor 200 million online sources for information about, for example, a brand. It then cleans up the information and sells it in real time to brand managers and others.
One of ListenLogic's founders, Vincent Schiavone, is a veteran entrepreneur who works on both sides of the field, starting companies and investing in companies as an angel.
Schiavone, who founded 4anything.com in the 1990s, said investors were setting the bar higher than in the past. "What it means to me, I need to carry my companies further before I go out looking for money," he said.
RoseAnn B. Rosenthal, president and chief executive of Ben Franklin Technology Partners of Southeastern Pennsylvania, said the investing process had slowed.
Companies that receive money from Ben Franklin must secure matching funds from private investors. "It's taking much longer for the matching money to come to the table," she said.
It used to be that Ben Franklin, which is facing its own struggle for funding in the coming fiscal year, kept commitments open for 30 days. Now, the group is having to give companies 60 days or more to secure private money, Rosenthal said.
Not that long ago, entrepreneurs with high credit scores had an easy route in the earliest stages of starting a business.
"During the boom times of the financial industry, many banks would tell an individual: 'No problem, just take out a second mortgage,' " said Therese Flaherty, director of the Wharton Small Business Development Center at the University of Pennsylvania.
Flaherty said that many would-be entrepreneurs took out second and third mortgages. That was not always a good thing because "the banks weren't really looking carefully at the business plan."
Like others, Flaherty said the current difficulty entrepreneurs face was not all bad, because it was forcing them to think more carefully about their business plans.
It might also be contributing to increased demand for services at small-business development centers like the one Flaherty heads.
She said attendance at the Wharton center's monthly First Step program, which helps would-be entrepreneurs figure out whether starting a business is a good move for them personally, had grown from the usual 20 to 30 recently, where it had been capped.
Among the entrepreneurs looking to the Wharton center for help is Jennifer Dempsey Fox, who along with her husband, David Fox, and partner Powell W. Arms founded Brave Spirits L.L.C., a Narberth company that markets rum, whisky, vodka, and gin.
The firm donates $2 from the sale of each $19.99 bottle to charities that benefit American troops, firefighters, and police officers.
Brave Spirits raised $765,000 from family and friends in late 2007 and early 2008. That money lasted longer than expected, Dempsey Fox said. And that was good, because the second round of financing - with a goal of $3 million - has been more difficult.
One factor is the predominance of technology and health-care-related investing in the Philadelphia region, Dempsey Fox said. "Finding those folks who do understand consumer products has been a challenge," she said.
A couple of years ago, some technology investors might have ventured into consumer products, but now, because of the financial turmoil and steep losses, "they've narrowed the focus back to their core business," Dempsey Fox said. "It is taking a lot of time. People are being very cautious."
Vuzit's Matzelle has close knowledge of that caution. Vuzit had more money lined up last fall - about 20 percent more - than the $350,000 it actually brought in, Matzelle said. The collapse in the financial markets caused some angel investors to get cold feet, he said. "They cut back a bit, or they said they can't do it all," he said.