Rebound on Tap for Venture Deals?
By ANDREW SIMONS
There could be more early stage venture capital investing in Orange County soon.
After years of shunning most new investments, venture capitalists say their interests are being piqued by refined business plans, compelling technologies and seasoned executives.
“The venture market is making a very strong recovery,” said Randy Lunn, a partner in the Irvine office of Santa Monica’s Palomar Ventures. “The entrepreneurs are better, the opportunities are clearer.”
You wouldn’t know it by the funding total, though the number of startups getting money is up.
So far this year, 27 companies in OC have drawn $179 million worth of funding, according to the MoneyTree Survey done by Pricewater-houseCoopers LLC, Venture Economics and the National Venture Capital Association.
Last year, 45 companies raised $439 million in venture funding. In 2001, 81 companies raised $792 million.
Even with 2002’s dismal first-half showing, the chemistry could be right for a funding rebound, venture capitalists say.
They say they’re getting more pitches than they did six months ago,a marked difference from late last year and early this year when business plan submissions ground to a halt.
Another factor: venture investors are getting hungrier. They’re sitting on cash after largely tending to existing investments in the past few years.
And the biggest driver of a venture funding comeback,Wall Street,is on track for its best showing in three years. Some companies even are starting to brave the waters for initial public offerings again.
“The markets have come back,” Lunn said.
This year’s rebound in the major stock indexes could presage a rekindling of public offerings and acquisitions,which is how venture capitalists cash out their investments.
So far this year, OC hasn’t seen any public offerings, though Newport Beach-based Conexant Systems Inc. spun off Mindspeed Technologies Inc. to shareholders in June.
Nationally, there have been only eight public offerings this year, including three by venture-backed companies, according to Thomson Venture Economics and the National Venture Capital Association.
OC merger and acquisition activity also has lagged this year, though the county has seen some deals, including Cisco Systems Inc.’s $500 million June buy of Irvine-based Linksys Group Inc.
Nationally, there were 140 venture-backed deals in the first half, just shy of 150 in the first half of last year.
No one expects a return to venture funding’s go-go days, like when OC startups raised a record $1.5 billion in 2000.
Venture investors have some advice for funding hopefuls.
Forget changing the world. Build technology that saves money instead. If you’re an engineer or a scientist with technical savvy, make sure you’ve got a good manager to keep you on track. Your business plan has to look exceptional.
And here’s a kicker: make sure your business plan has enough upside.
“One venture firm told me my business plan wasn’t risky enough,” said one entrepreneur who asked to remain nameless.
The entrepreneur said the profit margin in his business plan was 45%.
That marks a change in tone for local venture capitalists, who have sought safer bets since the technology downturn.
Medical device makers, healthcare technology and other startups have drawn the lion’s share of funding here for the past two years. For venture capitalists, healthcare investments are long-term plays,with an acquisition or public offering in four to 10 years. Technology companies tend to go public or be bought in two to four years.
The most active venture investor in OC last year was Newport Beach’s Versant Ventures, which focuses on healthcare companies. Versant invested $21 million in OC medical device makers in 2002,up from $4.2 million a year earlier.
Versant portfolio companies include San Clemente’s Cameron Health Inc., Laguna Niguel’s Cogent Healthcare Inc., Laguna Niguel’s Glaukos Corp. and Irvine’s IntraLase Corp.
A host of other healthcare companies have drawn funding recently. Lake Forest heart device developer Orqis Medical Inc. raised $25 million in June. Aliso Viejo-based SenoRx Inc. raised $19 million in July.
Newport Beach-based AD PathLabs Corp., a tissue testing company, raised $8.9 million in February.
But technology startups are showing signs of life again,especially those offering products that boost efficiency without major spending.
Take Irvine’s Aktino Inc.
The company, started by a group of alums from Pairgain Technologies Inc., now part of ADC Telecommunications Inc., is developing a telecommunications device. The startup recently closed a small undisclosed first funding round,$5 million to $10 million, according to venture capital sources.
Menlo Park’s Foundation Capital LLC, the Irvine office of Woodside’s Crosspoint Venture Partners LLC and Corona del Mar’s Miramar Venture Partners LLC are Aktino’s investors.
Aktino’s founders have been coy in giving details about the company. Aktino’s “products for broadband transmission create a new category of performance and reliability for broadband services over the carriers’ existing access networks,” according to the company.
Translation: the company’s products could save big telecoms money.
“We like companies that can produce long-term cost savings rather than a focus on the next big thing,” said said Bob Holmen, a Miramar partner. “Companies don’t want disruptive technologies. They want technologies that can save them money.”
Look at another company that’s received funding recently: Irvine’s Avamar Technologies Inc.
Avamar’s software and storage devices allow companies to easily back up large amounts of data without “tying up the pipes” of their networks. The company says its software and data storage servers are a cheaper, more efficient way for banks, government agencies and others to back up data.
Avamar just closed on $13 million in venture funding from Goldman Sachs Group, Benchmark Capital, CMGI@Ventures and Lightspeed Venture Partners, among others.
Venture capitalists also say they’re getting pitches from chip startups, a mainstay of OC tech hopefuls.
“We see a number of entrepreneurs from Broadcom and Conexant progeny,” Holmen said. “There are a number of engineers and designs in the communications space.”
