Quiet Period.

Internet financiers are looking for deals--very carefully

IF YOU THINK THE CREATIVITY IN AN INTERNET START-UP IS limited to content, you're barking up the wrong tree. The real ingenuity these days is how to finance your idea. "We're in a new economy with old realities," says Antonio Belfort, co-founder of Nascentweb, a Miami-based dot-com investment fund.

Those old realities have meant a reshaping of business models to include profits that can be seen on the horizon at least. Investors are looking for ideas that they know are going to work, and start-ups are looking for alternative funding methods.

"The rules have changed because of the market situation," says Alejandro Zubillaga, managing partner of eQuest, a New York-based venture fund for Latin American Internet projects. "There's not the deal flow there was. We used to get projects and calls every day. That's been reduced by 90% to 95%."

Since Wall Street last year started taking a dim view of dot-coms that bled red ink, venture capital for start-ups has withered, along with IPOs and Net companies' valuations. What once was money for the asking is now as scarce as water in the Sahara. "Financing is a lot more difficult," says Greg Kyle, president of Pegasus Research in New York. "In Latin America, it's much more difficult .... There's still concern over (Internet) penetration."

The region has seen several dot-bombs over the past six months, and Kyle says more bankruptcies are likely: 2001 will be the year of Internet consolidation. The bear market, Kyle says, "is forcing them to reach profitability as quickly as possible, which a lot of start-ups are finding hard to do."

If you're looking for funding these days, venture capitalists say a proven business model, like online auctions, is essential. "Any model purely advertising-based doesn't work," says Zubillaga, whose fund has a portfolio of six Web companies--a number that he says will probably remain static for some time. "We're focused on getting them to the next stage--break-even point," he says.

Belfort of Nascentweb says his fund requires a business-to-business, or B2B, focus and a bricks-and-mortar partner. "Business models have repositioned," says Belfort. "It's necessary to have that off-line partner that will have liquidity and support. Investment funds are a lot more cautious. You can't just copy a model from the U.S. anymore."

Consumer-driven Web start-ups-so called business-to-consumer, or B2C, sites-are no longer attractive prospects, both Belfort and Zubillaga acknowledge. "In B2C, when you're simply substituting a bricks-and- mortar business without giving added value to the 'C', there are few opportunities, with a few exceptions like Amazon," Zubillaga says.

With profits months, if not years, down the road, netrepreneurs have to be more ingenious in developing financing sources when friends and family run out. B2B site Vexem.com has come up with a novel franchise model that will enable it to expand throughout Latin America without venture capital, says Alejandro Payan, vice president for business development at Miami-based Vinco Networks, parent company of Vexem.

Under the model, Vinco seeks an investor to finance 12 to 18 months of operating costs, or US$1.2 to $2 million, to launch Vexem in a particular country in return for a 35% to 50% stake. Like a franchise, the investor operates the site with help from the home office but does not receive full participation in the company until he or she reaches performance benchmarks.

"We give warrants against performance," explains Payan. "For example, on day one, the investor gets 20% of his share with warrants for 30% more every six months, but they have to make a commitment in terms of performance."

Diego Lanus, founder of Buenos Aires-based Internet phone site Ligados.com, is hoping that the U.S. spring will literally mean the wintry financial climate is over. Since launching last May, he has developed an investor pool financing scheme in which seven investors will ante up $1.5 million in an all-or-nothing effort. He hopes the scheme will come together by March. "We've got several investors interested, but we're still seeking the lead investor, which will close the whole operation," he says.

Zubillaga, nevertheless, believes that investor confidence will return to Latin America once a big name starts recording numbers in black. "In a year, when a benchmark company like StarMedia breaks even, people will come back to Latin America Internet," he says.