"[1999] is never coming back .. it will never be the same," says Bernie Grybowski, president of Internet accelerator HDL Capital Corporation. Bernie well understands recent changes in the VC market for early stage deals.

"What we [HDL] do is we get very early into deals. We put up some of our own money, we get a close circle of associates to ante-up with us, to do an early stage SEED round of about a million dollars," says Bernie. "Very early, very low valuation, and we then work with the company on a literally day by day basis to help them grow the company. And that's finishing the product .. augmenting the management team, attracting directors or advisors, introducing them to suppliers, to buyers, customers, and of course financing along the way is pretty – nothing moves too far without money."

Venture Capital (VC) for early stage deals has largely dried up from the 1999-2000 highs, with lots of factors, says Bernie. The retreat of angel investors - essentially private investors - and retrenching of the venture capitalists have had the greatest impact on financing early stage deals.

"They [the angels] are probably the ones who have been hit the hardest by the meltdown in the public markets, so they've kind of lost their bankrolls," says Bernie. "They don't have money to keep playing any more, or offer more money to the companies they're in, or to look at new projects. So if the liquidity didn't get them, their nerves might have because they're saying 'whoa, maybe I should just stop where I am'."

And while the angels retreat, Bernie says, the VCs – who had been edging down into deals at earlier and earlier stages – have retrenched. Not only are VCs revising their risk-reward ratio, happy to take a lesser risk for a lesser return, but expect them also to spend more time and money on their in-house portfolio, the companies they have already done deals with.

"They are going to pick the winners, or the ones they want to keep surviving, and they will spend time and money on them, which takes away time and money from new deals. Now I'm not saying that new deals are going to totally dry up, but in relative terms it's a substantial shrinkage," says Bernie.

For HDL, this shrinkage has a positive side: a lot of space in a previously cramped sector. "[This] leaves a vacuum in there for us, which we think is fantastic. We're actually going to go out and raise $25 or 30 million ourselves; we're going to hit the road next week, because we think now is a great time in venture capital," says Bernie.

Part 1: Venture Capital: Financing Early Stage Deals in 2001
Part 2: Revised Financing Requirements: Back to Basics
Part 3: Recession worries?
Part 4: Making Contact