While stories of outright distress sales of dotcom companies facing a cash crunch are still few and far between, it's the dark rumours of cash-starved companies anxiously awaiting funds in a bleak market, that really abound. Dotcoms at every stage of their lifecycle need a fresh infusion of capital and most Internet players in India today face a situation where investors are wary of infusing capital into their companies. While some are at the startup stage and await angel funding, others who have had the initial kickstart await their first round.

A few who had wrapped up the first round find themselves strapped for cash at this juncture with very few takers. Most of them spoke to this paper on condition of anonymity. ``A few months ago we could have finalised a funding deal over dinner, today it is taking us months,'' says one entrepreneur who runs a recruitment site. He also adds that it is a severe cash crunch and hardly any investor response that is prompting outright sale of sites today.

The promoter of an online grocery store adds: ``Mention the word B2C to a VC and the immediate response is a `no' today, after which no amount of convincing gets us anywhere''.

Industry observers also feel that it is spaces like education, travel and jobs which are likely to be hit first in the shakeout given the fact that there has been market saturation in these spaces for a while now. Prognosis: look out for mergers of the kind seen in the customer feedback space.

Says Munesh Khanna of Arthur Andersen: ``We had seen this market saturation as early as March this year and in fact have an internal mandate of not getting into the first-round funding process anymore''. Mr Khanna said a decision had been made by the company months ago to move up the value chain: concentrate on mergers and acquistions and second-round funding only, since the consolidation in the sector called for this move.

But while the first to feel the pinch are companies shopping for first-round funding, the bruises are no less painful for second-round companies either. Apart from News Corp which has been making a slew of round-two investments in the country, there has been hardly any activity on second round funding in any Internet space in recent times. Question entrepreneurs looking for round-two funding on their experience and the reaction is uniform: ``The timing seems to be all wrong''.

VCs like Neeraj Bhargav of eVentures say that valuations for round two companies are down by anywhere between 25 and 50 per cent since Februaury this year. Valuations of Internet companies, particularly in the B2C space, have fallen by upto 10 times in several cases in the last few months according to prominent VCs like Latika Ahuja of Citibank Private Equity.

Believe the horror stories. Most companies are benchmarked against publicly-listed companies when it comes to pegging a value on them and one look at the market capitalization of publicly-listed Internet plays whose market cap is down by anywhere between four and seven times, really tells the sorry story.

So what exactly has happened in the past few months where the pendulum has swung from a situation where the entrepreneur could ditch a VC in favour of a higher bidder, to a situation where entrepreneurs are being forced to consider sell-outs in desperation?

The reasons are several. The most obvious is the fate of the stock markets overseas where B2C plays are reviled today, which has made domestic investors wary of the businesses as well. At the time of investing in a company, the investor expects a certain pay-off which is to a large extent dependant on the market conditions. When the markets crash, these payoffs are naturally reduced, forcing the VC to rethink his strategy.

Certain hometruths about B2C and B2B ventures have been highlighted with the correction in the US markets, according to Ahuja. ``The low operating margins of these plays just don't justify the scale of investment going into them and this is something that the US markets have reacted to,'' she adds. Coming to the domestic scenario specifically, VCs like Vikram Godse of Infinity Ventures say: ``A lot of funds came in together some time ago and wound up funding several companies in the same space. What we are currently seeing is partly because those spaces have gone sour with so many investments which has greatly reduced the growth potential of each of the companies. Obviously, VCs have to take a view on some of these investments at this juncture''.

All is not lost however. Mr Ahuja of Citibank says that it is largely the B2B and B2C investments that have been hit while technology plays, service companies, media and telecom concerns are likely to command investments even in this market. ``There has been a polarisation in the US markets whereby most technology plays have resumed their original levels today while B2B and B2C concerns are down, and what we see is a reflection of that," he adds.

Mr Bhargav of eVentures also adds that this is "a good time to keep your head down and scout for ventures which operate in areas like infrastructure, services, wireless etc, since valuations are really low". He adds that the days of pure play, vertical, niche vortals are clearly over. "Some segments like niche vortals have turned south but the trend is not applicable across the board,'' he explains.

When asked if angel and first-round funding for startups is likely to stage a comeback, most VCs said that is was not likely to for the next several months and when it did the parameters for assessing companies would be very different.

``Investors are already wary of high cash-burn situations and certianly look for faster time-frames to profitability'' says Mr Bhargav. ``Pure Internet plays with high cash burn are being trashed,'' he adds categorically.

Hic! The party's over.