Healthcare Leads Q1 Funding
By RAJIV VYAS
Healthcare companies continued to be the dominant sector among those getting venture capital funding in Orange County, despite the overall tally falling dramatically in the first quarter.
One in three OC companies that received funding in the March quarter were medical-related, according to the Price-waterhouseCoopers LLC MoneyTree Survey done in partnership with Venture Economics and National Venture Capital Association.
“Relative to information technology, healthcare is much more attractive,” these days, said Barbara Lubash, managing partner at Versant Ventures’ Newport Beach office. She said the Internet meltdown in the last few years continues to draw funding to the healthcare sector.
Nine OC-based companies received $76.4 million in venture funds in the quarter.
One of the companies, Foundstone Inc., an Irvine-based computer services company, did not report the amount of its funding.
Two medical device makers and one a biotech company captured $34 million, or 44%, of the total with a big chunk of that coming from one company, San Clemente-based Cameron Health Inc.
Cameron was the top investment for the quarter, taking $31.5 million, or almost 40% of all the venture funds.
“We see a great growth opportunity for Cameron,” said Lubash whose fund participated in the funding.
San Juan Capistrano medical device maker Opus Medical Inc. and Irvine-based biotechnology company Galt Laboratories Inc. were the other healthcare-related companies securing funding.
While medical technology companies were attractive, overall venture funding was down.
Total funding fell 70%, compared to $260 million raised by 32 companies in the March quarter in 2001.
The funding also dropped sequentially. Twenty-three companies received $199 million in the fourth quarter.
The fall in OC venture funding mimics the national trend. With the economic slowdown and the effects from the dotcom explosion still being felt, venture funds have become more cautious.
Average funding per company has increased in OC as venture capitalists fund later-stage companies that are either profitable or on track to profitability. An average of $9.5 million was allotted to the eight companies that reported their funding in the quarter, compared to $8.1 million per company in the March quarter a year ago.
But this quarter’s per-company funding average is skewed by the dominant Cameron deal. Without Cameron, the seven companies raised an average of 6.4 million, less than last year.
“I don’t believe (the fall in VC funding) is a reflection of a fundamental flaw in Orange County’s economy,” said Murray Rudin, a partner at Los Angeles-based private equity firm Riordan, Lewis & Haden and head of its Irvine office.
“I wouldn’t read dire long-term conclusions into it.”
Nationwide, 787 startups raised $6.23 billion from venture and private equity investors compared to $22.3 billion raised by 1,803 companies in the March quarter last year.
“The Orange County experience pretty accurately reflects what is going on in other parts of the (country),” Lubash said.
One difference: funding per deal nationwide declined 36% to $7.9 million in the March quarter, compared to last year’s quarter.
But U.S. venture funds continue to be cautious.
Rudin said that there are three main reasons why venture funding has been falling.
“Valuations have come down somewhat, debt markets have tightened and financial results have softened so it’s not the best time for owners to sell,” he said. “You have fewer people selling their businesses and fewer businesses growing at a rate where they need growth capital. And with a slower economy there are fewer people striking it out on their own.”
Lubash attributes the decline, in part, to a “greener” crop of venture capitalists.
While venture funds still have plenty of capital to invest, she says, the people working for them don’t have many years of experience and are taken aback by the current investing climate.
Another reason: “There are some funds that are concentrating on their non-performing portfolio companies,” Lubash said.
In this tough market, three OC companies stole the show this quarter raising more than $10 million each. In addition to Cameron, Irvine-based data protection software maker Avamar Technologies Inc. took in $12 million and Irvine-based enterprise software maker TCI Solutions Inc. raised $13 million.
In the last four quarters, the healthcare-related sector has received more funding than once-hot Internet and e-commerce companies.
(The medical sector passed the Internet-related sector in the June quarter last year when 10 medical-related companies received $73 million or 42% of the total funding.)
OC reflects the weakened enthusiasm for biotech investments, with Galt Laboratories the sole biotech firm on this quarter’s list. Lubash said healthcare and medical device makers continue to attract money at biotechnology’s expense.
“The interest in biotech has declined dramatically compared to several months ago and it’s a reflection of the environment,” Lubash said. “There was a frenzy of investing in biotech companies. But just like other sectors there are only a handful of top-notch companies. Investing in biotech is cyclical just like information technology and Internet.”
Other companies receiving funding in the quarter: Irvine-based retailing company The Return Exchange Inc. raised $7.9 million, Irvine-based food and beverage business Naturade Products Inc. took in $2.5 million and Irvine-based e-commerce company HireRight Inc. raised $7.2 million.
