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Soft Sell: Local VC Funding Weakness Persists

Soft Sell: Local VC Funding Weakness Persists

By CHRIS CZIBORR

Local funding by Orange County venture capitalists was dry again last year as firms nursed existing investments from prior years.

Local venture capitalists reported a 46% decline to $53.9 million for funding of Orange County-based startups in 2003, versus a year earlier, according to this week’s Business Journal list.

The list only ranks venture firms operating in OC by their funding of local companies. The list doesn’t include investments in OC companies made by firms that don’t have offices here.

Venture investing often is a spotty, drawn-out process that comes in chunks. That’s reflected by the list, which shows a number of the firms sitting on the sidelines last year.

In fact, nine of the list’s 20 venture capital firms, including two Business Journal estimates, didn’t invest any money in OC companies last year. Four upped their investing from 2002. Ten firms invested less money,in some cases no money,in OC startups than they did a year earlier.

One venture firm,No. 17 Miramar Venture Partners LP of Corona del Mar,said it invested money, but wouldn’t disclose the amount.

In all, OC startups attracted $375.5 million in venture funds last year, according to the MoneyTree Survey by Pricewater-houseCoopers, Thomson Venture Economics and the National Venture Capital Association. The survey measures investments from OC- and non-OC-based venture firms.

Last year’s total was a 13% decline from the $431.2 million invested in OC in 2002. It was the lowest tally since 1997 and only about a quarter of 2000’s record $1.5 billion.

OC was in line with national trends: Venture capital funding in the U.S. fell 15% to $18.2 billion last year.

Healthcare and medical device companies have grabbed much of the funding by local venture capitalists, and last year was no exception.

And there hasn’t been much of a change this year.

Local startups nabbed $54 million in funds in the first quarter, the smallest amount in six years and down from $129 million in the fourth quarter, according to the MoneyTree survey.

The top venture firm on the list, Huntington Beach’s ASRI LLC, invested $25 million in OC companies last year,up from $15 million in 2002. ASRI’s investment tally included $5 million in a “medical diagnostic” startup, according to the company.

ASRI officials couldn’t be reached for comment. The firm, which moved up from No. 3 last year, is headed by Steve Kumar, who has had stints at IBM Corp. and Rockwell International Corp., which spun off its semiconductor unit Conexant Systems Inc., formerly based in Newport Beach.

The Newport Beach office of No. 3 Menlo Park-based Versant Ventures, which focuses on healthcare-related startups, pulled back its funding of OC companies by 76% to $5 million last year. It moved down two spots from the top ranking last year.

“On the positive side, deal flow was excellent,” said managing partner Barbara Lubash. “At the beginning of 2003, there was a lull, a slowing of the investment pace in the first half. But in second half and first half of this year, it’s been at the normal pace.”

Still, Lubash said Versant is concerned about the increasing amount of venture capital raised per company,especially in biotech and medical device companies.

“The concern there is we’re overfunding these companies with excess of capital that could be dampening returns for the company’s founders as well as for the early-stage venture funds,” Lubash said.

No. 5 Newport Beach-based Odyssey Venture Partners LLC doubled its OC investing with $2 million in funding last year.

Half of Odyssey’s funding went to Irvine-based Oryxe Energy International Inc., a company looking to get oil refineries to buy its pollution-cutting fuel additive.

“Environmental energy companies are a new area in venture capital investing,that’s an area we’re focused on right now,” said Walter Schindler, founder and managing partner of Odyssey. “Most people don’t realize that OC has a significant number of companies in clean energy technologies.”

In the past, Odyssey has invested in technology startups, but is lukewarm on the sector for now.

“We looked at deals in that space but haven’t found anything we liked there,” Schindler said. “That’s a great space for innovation but it was overfunded.”

Overall, Schindler said he is upbeat about venture funding for 2004.

“This is the best year for venture capital in the last three years,I think the market has stabilized,” Schindler said. “I think psychology has stabilized,people are willing to make multi-year commitments of capital now for the first time in a while. And institutions have developed some appetite for venture capital.”

Schindler said he expects Odyssey will invest about $4 million locally in 2004.

No. 8 MedFocus Fund LLC in Irvine almost doubled its OC funding to $900,000 in 2003.

The big news for the biomedical-focused venture firm: Minneapolis-based Medtronic Inc. said it planned to buy Vertelink Corp., an Irvine maker of spinal devices, for $22 million.

MedFocus was a Vertelink backer.

“That was a highlight for our fund,” said Tracy Pearson, director of administration of MedFocus’ fund.

Pearson is upbeat about 2004.

“There are many good ideas out there available for funding, and funding is more available than it was a few years ago,” Pearson said.

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