Look Who's Getting Funded

But well-run companies that bring unique value propositions to large markets have continued to acquire capital during the economic downturn.

"The companies that are getting funding today are top-quality companies," National Venture Capital Association (NVCA) vice president of business development Jeanne Metzger told the E-Commerce Times.

"They have had to meet higher standards than those companies that received financing during the boom period of the late 1990s," Metzger said.

All told, investment rates have held steady at US$6 billion to $7 billion per quarter, similar to the boom times of late 1998 and early 1999, the NVCA said.

Size Matters

Large markets that complement e-commerce products and services already in place -- including Web Services, electronic bill payment, supply chain collaboration and business intelligence -- have attracted the most capital recently, according to financiers.

And analysts and entrepreneurs said today's investors have become astute market-sizers after watching recent years' investments evaporate in undersized markets.

"Companies must show that their market is real and big, not a niche market," US Bancorp Piper Jaffray analyst Safa Rashtchy told the E-Commerce Times.

Growth Potential

In January, Cambridge, Massachusetts-based Celarix closed a $17 million funding round led by Austin Ventures. The company successfully found funding largely because it serves the massive supply chain event management market.

An early entrant in a market valued at $1.1 billion by AMR Research , Celarix provides software and services that rapidly disseminate data throughout the supply chain.

Similarly, ample market opportunity drew investors to electronic bill payment company Avolent.

"The electronic bill and invoice payment market has tremendous potential," Avolent vice president of marketing Brian Valente told the E-Commerce Times. "U.S. companies spend $120 billion per year sending invoices to consumers and businesses."

The San Francisco-based firm secured $40 million in November 2001 in a successful fifth financing round.

True Value

In addition to addressing sizable markets, would-be fundraisers must demonstrate a unique value proposition that offers significant improvements in productivity and cost savings, analysts said.

"In the past, VCs were willing to throw money at business models that simply took a traditional business and 'Web-ified' it, like Pets.com," Morningstar.com analyst George Nichols told the E-Commerce Times.

"But investors are now looking for ventures that change the way business is done," Nichols added.

Execution Day

A long-time backer of such change agents, Waltham, Massachusetts-based Charles River Ventures, participated in Celarix's latest round.

"We look for big and unique ideas that serve a huge market," Charles River spokesperson Meg O'Leary told the E-Commerce Times. "Celarix takes a unique approach to [supply chain automation] with a network-based solution."

Indeed, Celarix executives -- who have landed more than $75 million since the firm's 1998 inception -- attributed their ability to raise their most recent round in just 90 days to the soundness of their business model.

"You cannot blame investors if your business model does not hold water," Celarix CEO Jim Daniell told the E-Commerce Times.

Talkin' 'Bout a Revolution

Likewise, early-stage firm Netezza is tackling the multibillion-dollar business intelligence arena with a patent-pending technology product that will begin shipping in the second quarter 2002.

"Our business plan leverages partnerships with integrators and independent software vendors that can help market Netezza's solutions and open doors quickly," Netezza co-founder and CEO Jit Saxena told the E-Commerce Times.

In March 2002, the Framingham, Massachusetts-based company closed a Battery Ventures-led funding round worth $20 million, its second round overall.

"The value proposition must be significant," NVCA's Metzger said. "VCs are looking for technologies and companies that can potentially revolutionize the status quo."

Follow the Leader

Venture capital firms look for seasoned managers to lead their portfolio companies and execute business plans, analysts agreed.

"We look for startups to be run by an experienced -- preferably serial -- entrepreneur who has a track record of success," Charles River's O'Leary said.

Led by Internet veteran Douglas Thompson, Avolent's management team wields deep industry knowledge, which lured lead investors Constellation Ventures and Rho Ventures.

"VCs are looking for strong market opportunity and a core product, but also a team that can exploit both of those opportunities," Avolent chief financial officer Stephen Ghiglieri told the E-Commerce Times.

For its part, Celarix boasts a management team comprised of 60 percent supply chain experts and 40 percent software experts, Daniell said.

Show Me the Money

And a clear path to profitability is now a requisite for obtaining venture capital, according to analysts.

"We are seeing a reversion to historical norms, where successful businesses generally hit the IPO launchpad three to eight years after starting up," Morningstar's Nichols said. "VCs want to see a company generate cash in a similar time frame."

Celarix's Daniell and Avolent's Ghiglieri said their firms will fit into this time frame if their profitability forecasts -- for next quarter and next year, respectively -- prove accurate.