Early last year, Chavando Group International picked up an assignment to conduct some due diligence on behalf of a venture capital firm exploring a deal. Today, the Sherman Oaks company, with a $20 million venture capital fund of its own, has about a dozen such assignments for other VCs and the research work has come to account for the largest portion of its revenue. “I’m not exaggerating,” said Elias Chavando, managing director of Chavando Group International. “Once a month we get another venture fund telling us they need help.” Chavando Group has always done some investigative work for other VCs, mostly helping to assess software makers, because several of the company’s partners have technical expertise in that area. But the most recent requests involve delving into areas venture capitalists have not researched before. “The main issue now that all the venture funds are concentrating on is, ‘is there a market for the product or service we’re trying to create?'” said Chavando. “We’re going very deep with marketing analysis and focus groups.” Venture capitalists, a worldly lot who pride themselves on their business savvy, aren’t running out to find other experts to evaluate their deals. But with smaller investment funds many have cut staff, and they are utilizing contacts they already know when they don’t have the time or resources to conduct the research in house. “By not having a lot of people in overhead, we’re more efficient, and with transactions much harder to accomplish, if we did all the research in house we’d be losing money,” said Jonathan Fink, managing director of China Channel Network Inc., a company that specializes in funding smaller firms. “So we try to keep our costs down.” Venture capital firms have long employed accountants and attorneys to conduct investigations into the finances of the company seeking funds and the personal backgrounds of its executives to smoke out unusual debts or other financial surprises and flimflam artists. They’ve used university professors and other experts to evaluate technology. But where marketing was concerned, research was typically limited to determining whether a technology was indeed unique or, better yet, patented. If it was, the reasoning went, the market would follow. With the dot-com debacle that followed, many now know better. “We’re back to pre-bubble analysis,” said Richard Koffler, CEO with Koffler Ventures, a firm that works with Tech Coast Angels. “Is it a little stricter? Perhaps the pendulum swung a bit, and we’re past, ‘I’ll cut you a deal in the parking lot.'” As many of the investments made over the past several years soured, it became clear that exclusivity alone did not guarantee a ready market for goods and services. Some ventures, particularly Internet businesses, never found a market. Other entrepreneurs learned the hard way that it would take too much funding to get customers to put their money where their mouse was. Many point out that the heightened emphasis on investigating potential investments is nothing new. It was standard operating procedure that was only abandoned in the past few years as investment fever hit an all-time pitch. If VCs took shortcuts to analyzing investments, it wasn’t just the lure of easy money eclipsing better judgement. When investors were plentiful and just about any startup promised a handsome payoff, he who hesitated might easily be left with an empty portfolio. “What’s changed over the last 12 or 18 months is they have the time to do it,” said Brent Reinke, founder of Gold Coast Venture Forum. “During the dot-com phase, they had to throw money at companies or risk that the company would go with some other VC.” Today, there is far less money chasing deals and investors no longer have to make decisions in the blink of an eye, elevator deals as they once called them. But there are just as many startups out prospecting for financing. Some believe that’s led to a growth not only in companies that can research potential investments but also in companies able to connect startups to financiers. “I don’t have any hard data,” said Tim Lovoy, practice director for Deloitte & Touche LLP’s technology and communications practice in Southern California. “But I would tell you anecdotally, from talking to VCs, they’ll all tell you they now have the luxury of doing due diligence and they’re able to do it more thoroughly. Anecdotally, it would make sense that there may be more of an opportunity for intermediaries.” These days, investment banks are less likely to look at startups because of the time it is likely to take before those companies can go public. Incubators, those that would nurture a new company through the business plan and funding process, have fewer slots for startups. “I probably get four or five calls a week,” from startups and other companies seeking funding, said Ed Pauley, president of Pauley Financial in Van Nuys. Pauley, who has been looking for debt and equity capital on behalf of other firms for many years, said he believes more companies are now seeking to establish themselves as intermediaries in the financing process. Some in the finance community say they are wary of such companies, unsure of the value they bring to the equation. But others point out that many companies that are not candidates for incubators or investment banks need assistance in finding alternate funding sources. “As a rule, people that are looking for money are only looking for money when they need it,” said Pauley. “I’m out there in the market every day looking for people who need money and people who have money. I develop more contacts because I’m out there every day doing it.” Pauley Financial works on retainer, and then receives a fee for successfully finding funding along with an equity position in the companies. Others may work strictly on a fee basis. Either way, these intermediaries say, the slowdown in investment spending has not stemmed the tide of those seeking investors, and their services are still sought, provided they have the right contacts. “The venture capitalists get thousands of these (pitches),” said Pauley. “And so I try to establish relationships with one or two or three so if I send something to them, they’ll look at it.”
