Mining venture capital: to gain financing today, use the right tools or get the shaft. (Business Opportunities).

In case you've been comatose for the past year or so, the gold rush is over. Entrepreneurs seeking their mother lode through the Net represent a dwindling breed. Many venture firms that funded them have rolled up their tents. And other financiers--especially those who didn't catch dotcom fever in the first place--are wary over the prospects of panning for fool's gold.

It's a much more ornery environment out there--and minority start-ups had trouble finding veins of capital during flush times. And, to make matters worse, venture firms have been forced to dig harder for money, too. That message was loudly echoed throughout Southern California's lush Ojai Valley Inn and Spa where more than 170 venture capitalists and investment bankers gathered at the recent conference of the National Association of Investment Companies (NAIC), the trade association for investment companies that invest in minority business'. Maintains Terry Jones, a general partner of $225 million Syndicated Communications Venture Partners (SYNCOM) in Silver Spring, Maryland: "It's been some time since the venture capital industry has been in a down cycle, and it is going to have to retool. It will be interesting to see how entrepreneurs deal with the reality that their goals may not automatically be achievable within a short period of time."

In the post-internet era, venture capital firms have been pumping fewer dollars into start-ups. According to Newark, New Jersey, research firm Venture Economics, a subsidiary of Thomson Financial Corp., VCs put a mere $34.9 billion into business' for the first three quarters of 2001, compared to a whopping $82.6 billion a year earlier. Financiers should no longer expect the lofty triple-digit returns produced by their investments just a few years ago. Now, the returns will be more down to earth.

The new reality is that entrepreneurs and venture firms will not find nuggets of opportunities lying on the topsoil. More often than not, they're going to have to mine capital with their version of pick-axes. However, Laurence Toney, entrepreneur in residence for Opportunity Capital Partners (OCP), an African American-owned private equity firm in Fremont, California, believes business owners shouldn't shy away from the challenge. "It's a great time to be an entrepreneur," says Toney, who scouts new deals for himself and OCP. "You can acquire talent at a reasonable cost, grow your company with more realistic expectations, and prepare for the rebound."

Not all venture firms are sitting on the sidelines tending portfolio companies. Cash-rich funds like $200 million Pacesetter Capital Group in Richardson, Texas, are ready to pounce on opportunities. Says Senior Vice President Linda Roach: "The current environment presents us with some buying opportunities. We just happen to be one of the firms in the position to take advantage of them"

To find the money trail, you should heed the advice from NAIC members as you learn the terrain. Consider the following strategies:

* Own your niche. Truth is there are still a few dotcoms that have managed to pull in venture dollars (see "Company Lands Sony Content Deal," Techwatch, this issue). And according to a number of early stage financiers, there are still sweet spots for seed capital: biotechnology, security, and material science. There will be opportunities for nontech companies as well--especially those looking for strategic buyouts. For example, former Procter & Gamble advertising executive Boss Love was able to obtain as much as $60 million over the past five years from such firms as Quetzal/J.P. Morgan Partners to build Blue Chip Broadcasting into an impressive 20-station broadcasting conglomerate. His focus: target urban radio stations in Midwest markets. Last year, Radio One (No. 17 on the 2001, BE INDUSTRIAL/SERVICE 100 list with $177.2 million in gross sales) acquired the capital stock of Blue Chip for $190 million in cash, stock, and the assumption of outstanding debt. Ross' payout: His initial $375,000 investment became worth $40 million overnight.

* Develop a realistic business model. Charles E. Ross, vice president of the $50 million Telecommunications Development Fund in Washington, D.C., says, "During the recent overheated period of venture investing, valuations were inflated. For the market to return to a more disciplined approach is good for everyone, including entrepreneurs." So even if you've developed a better mousetrap, expect to get considerably less funding and, unlike the go-go '90s, give up a heftier chunk of equity. Therefore, business operators need to create strategic plans that demonstrate profitability, as well as display financial discipline, when developing products and services.

"For companies seeking additional rounds of funding, the toughest challenge will be establishing and achieving significant milestones, while involved in an extended fundraising cycle," Ross explains. "Changes in the capital market have lengthened the time between series A and series B rounds of financing. As a result, venture backed companies must be conscious of maintaining a much lower burn rate." Also, be prepared to wait longer to execute the exit strategy--five to seven years, instead of three--such as a strategic divestiture or initial public offering.

* Build a solid business team. There's one critical factor that will seal or rip apart any deal--people. "You need an outstanding team with a solid track record of executing a strategy," says Michael Fields, a managing member, of Palo Alto, California-based New Vista Capital. "Develop a must-win culture for your company. Everybody must have a sales attitude, and always have someone in place who owns sales, and that can't be the CEO, because the CEO has to look at all aspects of the business."

When making a clear-eyed evaluation of the strengths and weaknesses of the management team, determine whether key individuals are playing appropriate roles within the company. And, by the way, don't even think of excluding yourself from this process. Maintains Fields: "You may discover that you have to fire yourself in order to grow your company." He knows of what he speaks: During the years it took to eventually merge Open Vision, his Pleasanton, California-based company with mammoth Veritas Software, he removed himself from the CEO's chair.

* Reposition your company--when necessary. You can't become tied to one formula. As the old tune goes: If it doesn't fit, don't force it. Find a more accessible model.

Consider Ralph Clark, a serial entrepreneur and current venture partner with Ascend Venture Group in New York. Three years ago, he received $3 million to $5 million from Angell Investment to develop Bigbow.com. Clark originally developed it is as an online gift and concierge service using e-mail technology. But he discovered this business-to-commerce paradigm was flawed.

For one, Bigbow.com's target market was over-developed. Secondly, according to Clark, "the economics needed--to go out and get more customers--was costly and not viable." As a result, e-commerce sales tanked.

Says Clark: "I found that we had to re-orient our assets." He renamed the entity, blue makoi, and made the shift from a business-to-commerce site to "an e-mail marketing services company," helping other companies promote their wares on the Internet. The end result: In October 2001, blue makoi was successfully sold for an undisclosed amount to UpShot Inc., an online subscription service.

All this means that entrepreneurs will have to demonstrate their competitive advantage to dig up capital these days. To strike your rich vein, it will require the acquisition of the right tools.

Alan Hughes E-mail: [e-mail]