Half of Venture Firms Passed on Q1 Funding
Half of the venture capital firms with offices in Orange County stayed on the sidelines in the first quarter as far as local investments are concerned, according to this week’s Business Journal’s list.
The list, which ranks 20 venture firms operating here, shows that 10 of them invested $43.6 million in OC companies in the first three months of the year. And those that were active during the period tended toward more defensive plays such as healthcare and business services.
Total OC first-quarter investments were down by 24% vs. the fourth quarter. Still, the figure was up 24% compared with the first quarter of last year,back when the economy still was hot. In the first quarter of 2000, the top 20 venture firms invested $35 million in OC-based companies.
The list doesn’t include venture firms that made big placements in OC companies but that don’t have offices here. Nor does it tally investments made by out-of-area offices of OC-based firms.
“VCs have been focused on supporting their own portfolios,” said Walter Schindler, chief executive, founder and senior general partner at Newport Beach-based venture capital firm Odyssey Strategic Partners LLC. “They (VCs) are very shy of making new investments in new companies.”
Odyssey ranked No. 6 on the list as it invested $4 million in OC-based companies in the first quarter. The firm’s investments include San Juan Capistrano-based Virtual CEO Inc., which makes software for consulting firms.
Topping the list is the Irvine office of Los Angeles-based Riordan, Lewis & Haden, which invested $12 million here during the first three months of the year. That was almost twice the amount invested by No. 2 Versant Venture Capital, which invested $7 million in the first quarter. Versant is based in Menlo Park with a Newport Beach office
“We have been closing deals at a more rapid pace then previously,” said Murray Rudin, general partner at Riordan, Lewis & Haden’s Irvine office.
Riordan invests in companies with at least $20 million in yearly revenue and a profitable business model.
“We provide equity capital for growth. Neither the contracting debt market nor the plunge in the stock market has affected us,” Rudin said.
Riordan does not do “bail out” funding, Rudin said, nor does it have any sector focus.
Lake Forest-based Gold Coast Venture Capital Inc. came in at the third spot with $6 million in first-quarter investments. Huntington Beach-based ASRI LLC ranked No. 4 with $5 million in funding. The Laguna Niguel office of Princeton, N.J.-based Domain Associates was No.5 with $4.3 million in local investments. The top five firms invested nearly 80% of venture money accounted for on the list.
Venture capitalists say the pendulum has swung and it now is an investor’s market.
“There has been a drying up of venture capital in early-stage companies,” said Schindler, whose firm focuses on investing in the early-stage round.
According to Schindler, he and his partners go through at least one prospective deal a day.
“Sometimes we look at two to three deals a day,” he said.
“Because of the fall in the stock market, a lot of venture firms have lost a lot of money,” said Steve Kumar, chief executive ASRI.
Still, Kumar said, there are many companies still looking for cash.
“We look at five to 10 deals a week,” he said.
Riordan Lewis & Haden also saw the biggest percentage rise in its investments in OC companies. Its amount invested was up 1,100% in the first quarter compared with the same period last year.
Still, Riordan made few bets in the recent quarter. It invested around $6 million in Irvine-based Axcelerant Inc., a broadband networking company. Its tally also includes a placement in San Juan Capistrano-based Silverado Senior Living Inc., which operates assisted living centers for people with Alzheimer’s. Silverado has 13 assisted living centers, most of them in Southern California.
The Irvine office of Woodside-based Crosspoint Venture Partners, which topped last year’s list, saw the biggest decline in local investment activity.
The firm saw a 94% decline in its investments in the first quarter compared to the same period last year. Crosspoint’s first-quarter figure was down 89% from the fourth quarter.
No. 9 VentureLab LLC of Newport Beach saw a 60% decline from a year ago, while No. 10 Pinecreek Capital, also based in Newport Beach, had a 50% drop in its investment activity year-over-year.
Investors said few dot-com companies got funded this quarter as firms were looking for good opportunities in healthcare and other more traditional sectors.
“In technology, there was interest in biotechnology,” Schindler said. “Outside of that, there is more interest in energy.”
The local slowdown in funding mirrors a national trend.
Firms have been cutting back on their investment activity,particularly on new deals,as they try and fix their money-losing portfolio companies. Investments and management focus for the first quarter was on reviving sagging operations, investors say.
“Right now, the process is that of recognizing losses. That should continue for the balance of the year,” Schindler said. “But next year, we should see resurgence in VC activity.”
While the venture firms’ investments create jobs, the firms themselves employ few people.
The 20 offices reported total employment of 90,up 1% from last year. ASRI had the most employees at 15.
The 20 local venture offices reported that, company-wide, their funds under management grew 45% to $6.25 billion.
Crosspoint Ventures, Domain Associates, No. 12 Irvine-based Palomar Ventures, No. 7 Santa Clara-based Ivestar Capital Inc., and Cleveland-based Brantley Partners IV had increases in their total funds under management of 50% or more. n
