The Silicon Valley Survival Strategy
By John Allen

When Madison's Hypercosm was six months old and looking to grow, its founders knew they needed outside financing. Their product, a three-dimensional graphics software package designed to enhance other companies' online customer service, wouldn't be ready to ship until the company was in its second year. In the meantime, they'd need cash to stay alive. So they brought in Laura Francis '88 as treasurer and chief financial officer.

Francis knows what it takes — and how much it takes — to get an e-business off the ground. Before coming to Hypercosm, she worked as an accountant in California's Silicon Valley, where her duties required her to advise and audit several start-ups. She found the entrepreneurial process exciting and decided she wanted to experience a company's launch firsthand. "It's a grueling process, and you sometimes work eighty-hour weeks," she says, "but it's lots of fun. I wanted to jump in."

While in Silicon Valley, she'd seen how high-tech companies could succeed by focusing on the future — on research and development and on sales — and not worrying about the present. But this attitude is only possible if there's plenty of financing coming in to keep the company going until it can convert research into revenue. Thus the Silicon Valley model is to seek money from investors to fund growth of the company, which it then uses to leverage into further rounds of investment, all based on the promise of an eventual, sizable return.

"Investing in a start-up is riskier than putting your money in a mutual fund," she says. "So investors want to see the opportunity for higher returns. The first thing they want to know is how they can get their money back out. We have to show the possibility of an exit event."

Such exit events, she explains, include acquisition by a larger company or going public with stock. Either could give early investors' shares a significant boost in value.

"Unfortunately," she says, "the market for public offerings is awful right now."

And so Francis and her colleagues face the challenge of convincing skittish investors that their company's product is "down-market-proof" — that it will thrive, even when other high-tech firms are starving.

"We've been fortunate," she says, noting that they've managed to establish good relationships with several investors. Though the financial community is fickle, "they're still willing to invest in software companies like ours."

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