As NASDAQ declines, student entrepreneurs see venture funds dry up

As the NASDAQ index slides to new lows every day and icons of the dot-com craze — such as Priceline.com and Amazon.com — crash to mere fractions of their highs, the euphoria that seized Wall Street last year is now all but gone.

"The bottom line is that the environment has just changed dramatically for entrepreneurs from a year ago," University economics professor Burton Malkiel GS '64 said. "A year ago anyone could go to Wall Street with a good idea and get money. It is extremely difficult to get money now."

With the downfall of several large, staple Web companies, many younger, student entrepreneurs have also had to face reluctant venture capital firms or have had to adapt to the new environment.

Brancusi Technologies, Inc., the winner of last year's business plan contest hosted by the student entrepreneur club at Princeton, has faced significant obstacles.

"We had made [it] to the point of signing a term sheet with a venture capital group. One month later, they wanted to change the term sheet and eventually withdrew, effectively costing us time and opportunity to pursue other investments," Wenjia Fang GS wrote in an e-mail. "It is difficult for the company. We are trying to sell the technologies, products and services."

Founded by Fang and Dirk Balfanz, both computer science graduate students, the company — which produces software that helps businesses develop wireless capabilities — has suffered from what Fang called a "lack of funding and lack of experience."

"We basically can't continue doing it. The company is dissolving and each partner is pursuing different opportunities," Fang said. "I think many dot-com companies have business models that are not validated, whereas many technology companies do. However, when [the] market makes a downturn, all companies are punished, including technology companies."

While it is hard to predict the economy's vicissitudes, Malkiel — author of the famous "Random Walk" theory — said he believes the NASDAQ will recover. But speaking of the credit crunch in venture capital firms, Malkiel said the "environment will never look as it did a year ago."

Venture capital firms that were eager to put money into new companies during the past year are now asking questions they should have been asking years ago, such as what is the product and what is the potential for profitability and sustainability, said Ed Zschau '61, an electrical engineering professor and adviser to the entrepreneurship club.

The environment "has gone from absolute love of high tech and the Internet to skepticism," Malkiel said.

While there is still enthusiasm for new goods and services, Zschau noted, people are realizing that the Internet is not the end.

Companies will be more successful if they are a combination of bricks and mortar and technology, he said.

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"The Internet is like the telephone — only one tool of a business," Zschau said. "Successful companies are ones that provide multiple tools."

Moses Kagan '02 — who is currently taking the year off to work at Krypteian Systems, Inc., a Cambridge-based company broadly involved in knowledge management — said the company has adapted to this new environment by raising money from private individuals and a consulting company.

When venture capital firms realized that not all the companies they invested in would reach profitability, the firms became more selective by pumping money only into a few specific companies, Kagan said.

"Venture capital firms don't want to continue throwing good money after bad companies, but they also don't want to give up on a company that can't IPO as quickly," he said.

Echoing Zschau's words, Kagan noted that venture capital firms with which Krypteian Systems has been in contact are focusing on issues of profitability.

"They don't want to fund research and development, they want to hear that you have a product line, and their money would form the marketing," Kagan said.

Krypteian Systems has secured funding from a consulting company, which Kagan said is beneficial because its analysts can offer advice throughout the process. The company has also taken several smaller investments from private individuals, which has helped build a network of people with a stake in the company.

"Being forced to work with not so large a pool of capital," Kagan said, has created a "company culture that values capital."

Krypteian Systems is currently working on its product line, which targets companies of about 1,000 employees. By selling the product to a few initial companies, Krypteian hopes to build reference accounts that venture capital firms can contact to learn about the success of the product.

Many companies' business models during the past year were solely based on Website traffic and not driven by a revenue-generating product.

"Student entrepreneurs were basically starting a company for a few hundred dollars," Zschau said. "Now they have probably figured that that doesn't make an idea, but if they are talking about building a product and service with a real value to customers and a lower cost than revenue then there are sustainable businesses."