“There was this irrational expectation and excitement that if they didn’t get involved, they were going to lose the opportunity,” said Joe Lieberman, president of SPIDERtel, a Web hosting company. “Investors also got caught up in the same emotional expectation and became willing to take substantial risks for this new business model.”

“It was like the Gold Rush,” said Joel Wiggins, president of the Enterprise Center of Johnson County, an incubator for technology companies. When Wiggins was still in Austin, Texas, he worked with a company that raised $33 million. The company later said it could have gotten by with $10 million.

“There was so much money out there, and investors were willing to invest it,” Wiggins said.

Companies drowned in capital, said Bob LaGarde, owner of LaGarde, an e-business software and services provider. The excessive capital encouraged the growth of infrastructure costs that were not sustainable without a quick path to revenue. If that didn’t materialize, the companies imploded.

Shaky Ground
It was like landing on a new continent in the late 1990s and not knowing quite how to navigate it, LaGarde said.

“There was this new emerging tech-driven economy, and it was not clear what sort of metrics were going to come out of this new economy,” LaGarde said.

LaGarde started his company in 1996 as a consulting business, changed it the next year to a product-oriented company and went to market with an e-commerce platform in 1998.

“At that time, I was uncertain how e-commerce was going to play out, and the struggles of companies like NetSales confirmed those kinds of uncertainties,” LaGarde said. “I couldn’t in good conscience go out and make blue sky claims and seek funding.”

People had the unrealistic expectation that the Internet would transform every industry at the same highly rapid pace, said Jim Dodd, president of Chemidex, which provides a search engine in the chemical and food industries. Take online groceries, for example. He said consumers weren’t ready to buy groceries online, so adoption didn’t happen at the rate needed to create a solid business.

The size of the opportunities, timing and sense of urgency all were hyped, as well as the competitive pressure to seek financing.

“There was this pressure that if you didn’t get money and accelerate your business, competitors would beat you to the market opportunity,” Dodd said.

Chemidex had some good initial investors who were of the Midwest old school mentality, said Bruce Ianni, Chemidex CEO. Despite the popular opinion that the rules of business had changed with the dotcom era, his shareholders were adamant that you still need a dollar at the end of the day to pay for expenses, and another dollar to pay for tomorrow’s expenses.

“They helped me stay away from the illusion of the hyper-growth mentality, which was the right formula for us,” Ianni said.

Tough Times
The dot-com bust was a scary time for many entrepreneurs. Early on, investors threw capital at anything that smelled like technology, said Tim Donnelly, president of SoftVu, a provider of technology-based sales and marketing solutions. The good news was the easy access to capital. The bad news was that capital was thrown at a lot of really bad ideas, drying up the available tech investment capital and leaving a bad taste in investors’ mouths for future technology investment.

Donnelly said he and his partners had to make tough decisions when the capital market dried up. Their original plan called for three stages of funding: angel investments, venture capital investment and IPO or strategic exit with a buyer. After two rounds of angel investments, the latter two options where pulled off the table.

He realized that he needed to rethink his business model to take into account the lack of available funding. He kept two out of 14 employees, liquidated additional assets and made it work. Now, he’s back up to 20 employees and profitable.

“We have bootstrapped our business since the bust occurred,” Donnelly said. “On the flip-side, we took advantage of some positive side effects, such as hiring newly available technical talent, moving to better physical space, purchasing infrastructure and equipment at post-bust rates and prices. It was an incredible learning experience.”

Rob Sweeney, CEO of Mobile Media Technologies, started TextCaster, a permission-based mobile messaging system in the post dot-com period. He said this was a fertile environment for developing solutions, especially since there were many lessons learned from the bust and an abundant supply of talent.

“In the pre-bust environment, high-tech companies with a great idea spent freely—often without a clear value proposition—with the hope of quick riches from IPOs and acquisitions,” Sweeney said. “In most cases, the market was not ready for what companies had to offer.”

To survive, Sweeney focused on the fundamentals of business—which many dot-com companies forgot during the mid-90s—and worked hard to understand his customers and their audiences. He focused on what customers wanted, and how his technology could enhance their lives.

Lessons Learned
“The ‘build-it-and-they-will-come’ attitude just doesn't cut it anymore,” said Jim Avazpour, president and CEO of Avazpour Networking Services Inc., an information technology services provider.

Angel investors are becoming more educated, as well as more savvy and experienced, Wiggins said. They are making better investments and finding greater success.

“Since they’ve been put through the burner once, investors and entrepreneurs are more skeptical and smarter,” Donnelly said. “Tech companies are evolving, and making better decisions. Now we’re not going to have a high-growth period with a bust, but more of a steady incline in the growth of the technology sector.”

Prior to the dot-com bust, investors were very interested in any business that had “.com” in its name or business plan, Avazpour said.

“They were looking for the next big IPO-bound company,” he said. “The investors were so high on dot-com concepts that they lost sight of realistic investment expectations.”

For example, Avazpour presented his idea to form Avazpour Networking Services to members of Kansas Technology Enterprise Corporation (KTEC) in 1999. After hearing his pitch and deliberating for a couple of weeks, they responded by saying they wanted to invest up to $250,000 for a sizable equity stake in an Internet-based business model that would potentially reach revenues of $20 to $30 million within two to three years.

Michele Weigand, vice president of investments and portfolio management for KTEC, said the organization is updating the processes for obtaining capital and trying to make access to capital more efficient. Previously, entrepreneurs would have to pitch their presentations 50 times to get to 50 investors, now they may have to pitch only three to four times to get to a hundred investors.

New Landscape
After the dotcom bubble, the economy tanked, so there was less money available to invest in new technology, Lieberman said. Now that business financials have improved, investors are willing to invest in a smart way. That means basing decisions on proven business models, increased efficiencies and strengthening customer relationships.

“Today businesses are rationally excited,” Lieberman said.

He said investors understand that the Web is a proven business model that entrepreneurs can use to strengthen relationships with their existing customer base and drive increased efficiencies in the way they operate their businesses.

Valuations also have become much more moderated, Wiggins said. Back in the dot-com era, there was so much money being invested, that it was difficult for angel investors to get involved because valuations were so sky-high.

Wiggins said there’s a lot less institutional money going after these deals now. In 2000, there was $100 billion in the venture capital industry; today, there’s $25 billion. With less money available, investors are choosing deals more carefully. He said venture capitalists can be more patient, which means angels can be more patient, giving more time to due diligence.

Investor Wish List
Investors always look first at the people involved in the deal, Wiggins said. They want to know what kind of industry, entrepreneurial and management experience the founder team has, and whether they have worked together in the past. Wiggins said investors aren’t investing just in technology, but rather a group of people they think can put the technology into the marketplace. Investors also look at whether the founders are putting in any money themselves.

Investors are interested in the market opportunity and how big or fragmented it is. They want to know how many players are in the marketplace, and whether there is a dominant player. What is the market opportunity?

From there, they will look at what kind of business model the entrepreneurs have and how they plan to make money. What are the planned margins, and what do the finances look like? How does the business plan to control costs and bring dollars in? In other words, investors want to know how the players plan to translate great product or service into a profitable company.

Weigand said KTEC looks for companies with a product that serves an unmet need. She also looks for entrepreneurs who know their strengths and weaknesses and have a plan to achieve their goals.

“Some entrepreneurs fear that if they show any weakness, they won’t get investment,” Weigand said. “I appreciate somebody saying, ‘We don’t have a CFO, but that’s in our three-year plan. Until then, we are going to outsource.’”

Although KTEC does independent market research to confirm what the entrepreneur is saying, Weigand said it’s beneficial if entrepreneurs can offer third-party research that shows there is a market for their product or service.

Investors also like to work with companies that have technology that is patent protected.

Weigand said it can be difficult to get patents in the information technology industry, because the software industry is so open and everybody uses open architecture. Software patents may be difficult to get, but entrepreneurs can get process patents protecting how software is used to solve a problem.
KTEC also looks for entrepreneurs that have a clear strategy.

“People sometimes think they have a cool new product that’s the greatest thing since sliced bread, and they can do everything with it,” Weigand said. “You can’t do everything well—perhaps a couple of things. Pick your strategy and stick with it. Be clear and articulate about strategy. Then you must execute well.”

Chemidex’s Ianni is confident that some Kansas City companies are going to become major players in the Internet economy.

“There are fantastic Internet companies in this town with great leaders looking to catapult businesses into the mainstream and take the proceeds and funnel them into new technology companies in Kansas City,” Ianni said. “That’s really exciting.”

Tech Company Defined
How you define a technology company depends on who you are. For example, Tim Donnelly, president of SoftVu, defines technology companies as those that deliver a product or service using an advanced technological device or computer software as its core revenue-generating vehicle.

A traditional technology company provides the necessary expertise to solve a technical problem or need, said Jim Avazpour, president and CEO of Avazpour Networking Services Inc. Technology outsourcing companies provide a set of technology services from back-end data center services to help desk support and engineering project management.

Jim Dodd, president of Chemidex, said technology companies span multiple industries and technology types, but he believes the late 90s technology “bubble” primarily was driven by expectations surrounding Internet technologies.

The investment and consulting communities have a more broad definition of technology companies. Michele Weigand, vice president of investments and portfolio management for the Kansas Technology Enterprise Corporation, said technology companies run the gamut from medical devices to information technology to bioscience to some sort of new manufacturing device.

“Last year we funded a company called Heartland Technologies, which makes a fan that purifies air more efficiently than floor units,” Weigand said.

From an investment point of view, it’s important that technology companies serve a need in the marketplace that currently is not being met, or that they meet that need in a better or more efficient way.

Ellen Jensen is the managing editor of Kansas City Small Business Monthly magazine.