DEMO 09: Recession clouds hopes for cash-hungry startups

The semi-annual DEMO conference is all about finding the next big thing, a company that can wow the technology world while raking in boatloads of cash.

Slideshow: 11 cool tech products at DEMO

But the 39 presenters at DEMO 09 this week were under no illusions regarding the fact that they are launching new technologies in a horrible economy. Venture capitalists like to keep tabs on DEMO companies but actually investing in one is another matter these days.

“It is a terrible environment to raise money,” David Hornick, a general partner at August Capital, said during a venture capitalist panel discussion.

Investing as a venture capitalist always requires a certain leap of faith, since your typical startup can’t prove every claim it makes, Hornick says. In this economy, investors will be less willing to suspend their disbelief when it comes to potential gaps in a startup’s business model.

Eric Tilenius of Tilenius Investments said he hasn’t invested in anyone since October. Entrepreneurs have to make the shift toward “capital-efficient” business models that can be built up on a budget and provide a clear avenue toward profitability, he said.

“The macro market right now is pretty bleak, if you look at the statistics,” Tilenius said. “The next 12 months are tricky. I’m sort of figuring it out day by day.”

After the dot-com bubble burst, it was obvious companies like Google were ready to power ahead with great business models, says VentureBeat’s Matt Marshall, who is slated to replace Chris Shipley as executive producer of DEMO at the end of this year. This time around, it’s not so clear which companies are poised to be the next big thing, Marshall said in an interview.

“We’re not seeing a whole lot of really promising companies with a lot of traction,” Marshall says. “You have folks like Twitter and Facebook. Both of those are still trying to figure out their business model.”

DEMO 09, held Monday and Tuesday in Palm Desert, Calif., wasn’t all doom and gloom. Shipley kicked off the show by acknowledging the economic conditions – nearly twice as many companies presented at DEMO one year ago. But Shipley argued that a recession, if nothing else, weeds out the pretenders, letting the cream rise to the top.

“There is nothing like a recession to clear out the clutter,” Shipley said. “[Companies] that are a little bit faster, a little bit more courageous are winning the day.”

Skout, one of the 39 presenters, is dealing with the economic downturn by putting fund-raising on the back burner and focusing on building go-to-market partnerships with larger companies.

Skout offers a location-based dating service accessed through mobile devices. CEO and founder Christian Wiklund says the online dating industry tends to be somewhat recession-proof, but notes that starting any company these days has its challenges.

“From a startup perspective, of course it’s going to be tougher to raise funds,” Wiklund said. “You have to be more frugal and you have to more agile in how you get to cash flow as soon as possible.”