Going public is the quickest route to capital for many entrepreneurs. But when that market is all but closed, what does a growing company do?

So it's back to the private markets for a handout. But there lies a double risk for many entrepreneurs. They will have to give up a lot more equity (or, in the case of bank loans, equity kickers), since valuations for private companies have been falling right along with the stocks of their public counterparts. And with lower valuations, venture capitalists already invested in a company will resist investing more themselves or letting a company go to others: They'll do anything to avoid a so-called down round of financing because it lowers the value of their investors' shares and thus forces them to report negative returns.

Even highfliers like Healtheon, which hooks up health care companies and patients on the Internet, are not having an easy time of it. After shelving its public offering in October, the Santa Clara, Calif. company went hat in hand to its initial investors, Kleiner, Perkins, Caufield & Byers and New Enterprise Associates, and Netscape cofounder James Clark. They kicked in $40 million at $6 a share—the very low end of the price range that the investment bankers had considered for the public sale. Valley insiders report that venture capitalists were none too happy about the investment.

Some venture capitalists suggest an old-fashioned solution. "I've been encouraging several of my portfolio companies to get bank lending and stock up on cash while they can," says Foundation Capital general partner Kathryn Gould.

Not always easy for many startups—especially Internet outfits. Collateral-conscious banks have trouble rationalizing loans to companies with virtually no hard assets. Those startups that can borrow face interest rates ranging from 9% to 16%. A young firm borrowing from leasing companies such as Comdisco can face even higher rates.

A cash crunch will mean some tough choices for entrepreneurs. "We're definitely looking at every expenditure at our portfolio companies to preserve cash," says Mayfield's Fong. Cutbacks sometimes bring discipline to unfocused marketing efforts and costly expansions. But they will inevitably hurt companies that need to invest large sums in infrastructure—Internet service providers, which lay wires and set up servers and connecting switches, and telecommunications companies, among them. Without the infrastructure, they can't generate revenues; without money, they can't build infrastructure.

Santa Clara-based Covad Communications, which hooks up businesses to telecommuters and provides other Internet services, faces that predicament after delaying a $144 million stock offering. FORBES estimates that its planned expenditures are at least $100 million this year and next, but it has only $122 million in cash on hand—and that from debt with rising interest payments, starting with $16 million this year.

A cash crisis helps firms that specialize in late-stage financing, such as Attractor Investment Management. "It's a very good time for us," agrees Gigi Brisson, a general partner of Attractor in Burlingame, Calif. "We're looking at some deals that we passed on the first time because we thought they were too expensive." Not a happy time for the entrepreneurs.

Source: Rita Koselka, Forbes