Jun. 7–To keep her fledgling software company afloat, Libby Alumbaugh maxed out her credit cards, put her house on the market, convinced her engineers to work for minimum wage and traded her prizedsilver Corvette for a Ford Focus.
But the sacrifices paid off this week when Alumbaugh nailed down commitments of up to $4 million venture capital for her El Dorado Hills firm, Compass A.I.
Such funding has been scarce in both Sacramento and Silicon Valley. Venture capitalists burned by the dot-com debacle have been leery of startups, preferring to pump money into more mature companies with real-life revenues.
Compass is only the second Sacramento-area firm this year to secure early stage venture funding. KeyEye Communications, which designs chips to push data over copper wires, closed a $6.3 million round of financing in February.
The key for Compass, Alumbaugh said, was scraping by until it found investors who really understood the company’s product and its potential to help big corporations track changes in their complex software systems.
“I had employees who were making $300,000 a year, and now they’re making $5.35 an hour,” said Alumbaugh, 43. She often had to take out cash advances on her credit cards to pay even those modest wages to her four employees.
Not anymore. The multimillion-dollar round of funding secured by Compass this week is being led by Leapfrog Ventures of Menlo Park. Several smaller investors, including Sacramento-based Capital Valley Ventures, are scheduled to chip in.
Compass develops software that helps a large company determine how changes it makes in its programs ripple through its entire information technology system. “We call it Compass because it helps you find your way,” Alumbaugh said.
Mapping such changes is crucial for corporate America, but it’s also a labor-intensive, costly task. Industry reports, she said, estimate that companies spend 33 percent of their IT budget on problems Compass addresses. Alumbaugh said that what takes a team of 15 to 30 systems analysts a month to do can be accomplished by Compass software in an hour.
Compass does not yet have paying clients who can verify that claim. But Jack Crawford Jr., managing partner of Capital Valley Ventures, said potential customers who have seen Compass software at work have said it could solve many IT problems.
“The enterprise integration market is a $7 billion opportunity,” he said.
Officials at Leapfrog could not be reached for comment.
Despite the company’s promise, finding investors for Compass was a serious trial. “This is a down economy, and trying to close funding was very difficult,” said Alumbaugh, who spent more than 20 years in the technology industry before founding Compass in early 2002. “I basically put every dime I had into the company.”
Investors, who include Alumbaugh’s friends and family, might soon see a tangible return from that struggle. Alumbaugh said Compass is close to signing a deal with a Fortune 500 company that could be worth $2 million.
While it makes for a dramatic story, Compass’ experience isn’t unusual for startups, said Clare Emerson, executive director of the Sacramento office of the American Electronics Association. “It takes a leap of faith to keep going into the office every day,” Emerson said. “Libby didn’t let her temporary financial situation get her down. She pitched her company to every VC who would listen and finally did her deal.”
Steve Nilan, whose company, CVV Accelerator, provided management expertise to Compass in exchange for equity in the company, said Alumbaugh and her staff were even forced to move into CVV’s offices to save rent. “If you can find a way to survive another month without paying utilities or rent,” he said, “that’s just more oxygen in the bottle to survive the next 30 days.”
With the infusion of venture capital, Compass’ staff now can breathe easier. And despite the ongoing technology slump, the stock options they received in lieu of competitive salaries could still result in a big payday if Compass is acquired or goes public.
Just attracting venture funding is a significant accomplishment these days. According to Venture One, which tracks VC investments, only 13 Bay Area software companies attracted seed or A-series money in the first quarter of this year. That compares with 34 companies that snared second-round or later-stage funding.
That’s because more mature companies generally have a track record of some success and are a safer investment. And because VCs are being choosy, they can squeeze the established companies for the same attractive terms they get from the money-starved startups.
“They’re investing in series-B deals at series-A prices,” said Jack Crawford Jr., managing director of Capital Valley Ventures, which is investing in Compass.
Looking back over the past sometimes-harrowing 18 months since her company was incorporated, Alumbaugh said she has no regrets. “If I didn’t have so much confidence in the potential of this company, I would never have done it.”
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(c) 2003, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News.
