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The process seems simple enough: You have an idea, you find a venture capital firm willing to invest, and you put your plan into action.
In reality, the process is a lot more involved and has changed significantly since the dot-com glory days.
Appearances Deceive
In the late 1990s, venture capital firms played fast and loose with Web companies -- and were involved in questionable practices that never reached the ears of shareholders.
"A lot tried for form over substance, and in making
the books look good may have rendered the company
not viable long-term," Giga Information
Group 
analyst Rob Enderle told the E-Commerce
Times. "That's one of the reasons why they
had so many failures."
A few years ago, practically all a startup had to do to get funding was to mention the word "Internet" in a business plan. But once funded, many Web companies discovered they had a long way to go before reaching profitability.
According to Enderle, some venture capital companies would come in and cut expenses very close to the bone to make a startup look better on paper. That way, they could guarantee a strong public offering and a nice return on their investment.
"Instead of making the company better, they focused on making it look better," Enderle said.
Doomed To Fail
But the biggest thing investors do not know about venture capital-funded companies is their rate of failure.
"The average investor is blind to the rate of VC success. The
success ratios are not necessarily that great," David
Furlonger, vice president and research director at
GartnerG2 , told
the E-Commerce Times.
During the boom years, even when a VC made its money back on a new company, many dot-coms went belly-up when the venture capital firms pulled out after the IPO.
"It would look very bad for a venture capital firm to do a public offering and then to have the company turn around and fail," Enderle said.
But he noted that in fact this happened quite frequently -- and while venture capital firms' reputations may have suffered, they already had the money in their pockets.
The problem was so widespread when Internet companies were hot that the failure rate for new dot-coms soared to more than 80 percent. But Enderle said the problem has largely self-corrected.
"I don't expect this problem to recur except occasionally," he said. "Anything more than a 10 to 20 percent failure rate, and you've got a problem."
Lingering Doubts
Doubts about the practices of venture capital firms remain, however. "There is still a feeling that VCs remain arrogant in the face of more difficult economic times," Furlonger said.
"VCs were wrapped up in the Internet furor, and they lost sight of what they were there to do," he added. "They thought they could put money into any venture and make money. There was less attention paid to due diligence and perhaps making more sound investments."
These days, venture capital companies are being much more careful about pouring money into Web companies.
"To go in and say, 'I'm an Internet company,' would cause hysterics in the aisles," Enderle said. "The one thing that would have made you golden a year-and-a-half ago will now brand you a loser."
There is still money out there, but it is more difficult to get.
"Now, you have to have a much better argument just to get a meeting," Enderle said. And these days, he added, venture capitalists are "second only to the CIA" in the thoroughness of their vetting processes.
"Now, you almost have to show revenue, clients and
product -- it sounds odd, but that's the way it is,"
Furlonger said.
