Is your Venture Capitalist-financed customer able to pay for the credit sale? Show me the money: The cash-burn rate is more important than ever. (Loss Prevention).

Venture capitalist (VC) financed businesses, often referred to as dot-coms, have provided new avenues for manufacturers and distributors to bring the product to market and make sales. Identifying the potential transformation in the distribution chain to scores of industries, VCs poured $100 billion into startup dot-com companies last year. The hallmark of the VC investment in a dot-com is to invest at the dot-com's startup, perhaps put an additional round or two of financing, and cash out through an IPO or when the dot-com is sold.

VCs never expect profits immediately from their dot-com investments. However, the VCs are restless with the continued downturn of their dot-com investments. Many dot-coms have burned through operating cash reserves, face losses and fierce competition, and tightened investment requirements from venture capital firms, resulting in a failure to pay vendors.

For the vendor selling to the dot-com, the capital structure is not like a "bricks-and-mortar" enterprise that relies on bank financing or internal financing to operate. Banks and asset-based lenders generally do not offer financing to the dot-com because of its limited operating history and lack of tangible assets to secure the financing.

However, when a dot-com's funding disappears, the dot-com often desperately searches for a buyer of the business. The insolvent dot-com shuts its door, finds a buyer or takes cash at any price. Vendors go unpaid. Tired of companies burning through cash, bondholders have recently sued to halt the use of cash and liquidate assets to pay creditors.

What Assets?

The value of most dot-coms is intellectual property, such as customer lists, licensed technology and engineering teams. In analyzing whether to sell the dot-com on credit, the credit professional must use different credit criteria. Excess cash burn rate is often the benchmark to determine whether the dot-com has assets available to pay for the credit sale. However, given the shakeout of dot-coms, a credit professional can no longer look to the VC to provide an additional round of financing to pay the vendor. Indeed, VCs view the current dot-com investment market as a "down round." This year, VCs are expected to invest half what was invested last year. This means it is harder than ever for dot-coms to obtain additional financing and perhaps harder to pay the vendor.

With the source of future capital stalled, more dot-coms are running out of cash and are faced with either shutting their doors, finding a buyer or securing cash from a VC at an extraordinary price. What does this mean to the credit professional?