Where are all the startups?

<p>During a recession, innovation flourishes as laid-off workers with big dreams and lots of time take advantage of their suddenly free schedules to start a business.</p><p>At least, that's how it usually works.</p><p>But some insiders say that isn't happening this time. The current recession hit the economy so hard it's nearly impossible for many people to obtain early-stage funding.</p><p>While there is an abundance of talented and eager job-seekers looking for work, many startups are having problems finding money to pay the bills while they attempt to turn an intangible idea into a profitable product.</p><p>In the past, many entrepreneurs funded their fledgling companies by using their homes as collateral, said Lorraine DuVernay, director of the Small Business Development Center in Santa Rosa. But with home prices in Sonoma County down about 50 percent since 2005, would-be entrepreneurs are finding that well dry.</p><p>"For most people, that's not an option now," DuVernay said. "We're seeing fewer people starting businesses."</p><p>Finding a loan to fund a new company is also difficult.</p><p>In an average year, 17 businesses working with the center receive a combined $5 million in loans. Last year, businesses working with the center only received $1.5 million in loans.</p><p>This year is shaping up to be even worse -- only one loan worth $35,000 was given to a business using the center during the first four months.</p><p>"That's not much of a loan. The credit markets are just really tight," said DuVernay, who spent 25 years working as a commercial loan officer before joining the development center.</p><p>Still, the recession is a bittersweet mix for entrepreneurs.</p><p>On the one hand, obtaining funding is extremely difficult.</p><p>On the other hand, everything from employees to supplies are available on the cheap.</p><p>"We've developed a prototype for almost no money," said Leo Stearns, co-founder and chief executive of a small Rohnert Park startup.</p><p>His company, Displ'aire, is developing a JumboTron-like video display that is portable. Displ'aire persuaded other well-established companies to provide manufacturing and supplies for the prototype at almost no cost.</p><p>Its suppliers are betting the product will hit it big and Displ'aire will become a large customer in the future.</p><p>"They're building post-recession business," said Rich Pierceall, one of its three co-founders.</p><p>Displ'aire is also keeping its costs down by giving its other three employees -- all engineers -- a slice of ownership in the company in lieu of wages.</p><p>Severance packages from previous employers allowed Displ'aire's founders to temporarily live without a paycheck and devote their time to an unpaid job at the startup, one of the factors that helps to fuel innovation during a recession.</p><p>The company initially tried last November to get funding to build its prototype. But the angel investors they pitched were fixated on the collapsing stock market.</p><p>"No one heard a word we said," Stearns said.</p><p>Now with a working prototype they believe can be manufactured for 20 percent of the cost of similar products, the startup is beginning to woo investors again. They've pitched three angel investors so far, and have another four meetings set for this week.</p><p>"We're begging for money," said Stearns, a telecom veteran.</p><p>But the market is tight, said Jerry Gladstone, a former Agilent Technologies vice president who helped found the Sonoma Mountain Business Cluster where Displ'aire is located.</p><p>"Money is becoming almost an insurmountable issue at this point," Gladstone said. "Money is the biggest challenge right now."</p><p>Angel investors and venture capitalists have significantly slowed spending, he said.</p><p>Venture capital investments in Sonoma County during the first three months of 2009 were at their lowest levels since 1998, according to VentureWire, a firm that tracks private investments in startups.</p><p>That hasn't stopped entrepreneurs from trying.</p><p>"The entrepreneurial spirit is alive and well despite money," Gladstone said.</p><p>Software companies are particularly well-suited to continue without funding, because they have low startup costs, Gladstone said.</p><p>Eric Burns is hoping to get his social network for automobile lovers off the ground despite the tough economy.</p><p>A former Cerent and Cisco Systems engineer, Burns is funding his Web site, GarageCity.com, by selling some of his cars and other investments.</p><p>"We're liquidating assets," said Burns, who also is located in the business cluster in Rohnert Park.</p><p>He is also relying on student loans he receives while working toward his masters degree in Information Systems at the University of San Francisco.</p><p>"If you can be successful now, when the boom comes you'll be good," he said.</p><p>He decided to start a social network for car lovers after he got laid off from Red Condor, an anti-spam company located next to the business cluster in Rohnert Park.</p><p>"I had the choice of searching for work or doing my own thing," he said. "I love wrenching and cars. So I decided to blend my passions, which sure makes it a lot of fun."</p><p>But how long companies can stay afloat without funding is the big question nagging away at entrepreneurs.</p><p>"We're on our last legs to keep the dream going," said Ulysses McKenzie, 25, a fashion designer.</p><p>McKenzie, who graduated from Rancho Cotate High School and went on to get a degree from The Fashion Institute of Design &amp; Merchandising in San Francisco, started True 2 Life Apparel in Petaluma with two other graduates from the fashion school.</p><p>The company's apparel has drawn praise from the hip-hop community, but finding an investor to fund the company and allow it to design a full line of apparel has proven difficult -- if not impossible.</p><p>"Basically, we need to invest in ourselves," said co-founder Tess Donaldson. "If we become profitable, then we might attract investors who can help us grow faster."</p><p>She has been working with the Small Business Development Center in Santa Rosa, and they recently presented their company at the annual North Bay Growth &amp; Innovation Forum.</p><p>Donaldson and McKenzie, who run the company out of a home in Petaluma, agree they can give the company another six to 12 months before they'll have to put off their dream and return to jobs at established apparel companies.</p><p>"You have to make a decision. And that is the most difficult thing," McKenzie said. "The fear is that you go work for another company and you never come back to your dream."</p><p>-- You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@pressdemocrat.com. Check out his blog at DailyGeek.Pressdemocrat.com or on twitter.com/eWords</p>