Venture capitalists aren’t investing like they used to. But they are raising money.
At least four venture firms based in Orange County or with offices here have raised nearly $650 million in the past year and a half. Three others are expected to garner another $350 million by December.
So, OC venture capitalists could be sitting on a billion dollars for potential investments, if the firms hit their targets.
Never before have OC venture firms raised so much money. But while local firms are rolling in cash, only a select few companies stand to be beneficiaries.
Money likely will go toward biotechnology, medical devices, manufacturing, some data networking and chip designers, and management-led buyouts. Unlike the late 1990s, dot-coms are unlikely to see any of it.
And much of the funding could go to second or third rounds,rather than early-stage placements where the risk of failure is highest. Companies already in the portfolios of local venture firms could grab the lion’s share.
As far as new investments, diversification likely will be the watchword.
“The OC market is a little removed from Silicon Valley,” said Greg Yurkovich, an associate at Newport Beach-based Forrest Binkley & Brown. “Southern California ventures often are more broad-based in their approach. Their mandate allows them to have a more diversified asset group.”
Forrest Binkley should soon close its third fund, Yurkovich said, raising an expected $70 million. In all, the firm aims to raise $100 million to $150 million in the near future.
Forrest Binkley already has two funds and is one of the larger venture investors in OC, with $350 million under management.
For now, few local venture capitalists are aggressively investing or taking the risks they were just a year ago. Out of the $650 million raised so far, around $500 million still is searching for deals.
Of course, venture capitalists take time to find deals and often look at potential companies for months before deciding whether to invest. But venture capitalists say their appetite for risk isn’t what it used to be.
“Whenever you have an environment the way we do, it is really not good to be bullish,” said Randall Lunn, general partner of Santa Monica-based Palomar Ventures and head of its Irvine office. “What has happened is that the criteria for making an investment has tightened up.”
In December, Palomar raised $220 million for its second fund. So far, the fund has invested around $20 million.
Still, Lunn said while he and his partners were cautious in the first half of the year, they plan to step up their activity. Palomar bankrolls software, chip, networking gear and other startups that focus on helping established companies to develop new products or conduct business better.
Palomar avoided dot-coms, Lunn said, and plans to follow its policy of not backing companies with weak business models.
Right now, “most VCs are scared to invest,” said Murray Rudin, a partner at Los Angeles-based Riordan, Lewis & Haden and head of the firm’s Irvine office.
Riordan Lewis started its first institutional fund in late 1999, raising $120 million. So far the fund has invested close to $40 million of that money.
The firm, whose lead name partner is gubernatorial candidate Richard Riordan, is a cross between a venture capital and leveraged buyout firm.
The firm plans to invest in companies that are profitable with yearly sales of more than $20 million, according to Rudin. Dot-coms or startups burning cash need not apply, he said.
Three other venture firms,Newport Beach-based Odyssey Strategic Partners LLC, Corona del Mar-based Miramar Venture Partners and Los Angeles-based Arcturus Capital, which has an Irvine office,have closed funds recently or are expected to soon.
Odyssey is on the road trying to close a $150 million fund. Miramar already has raised $70 million for its fund. And Arcturus expects to close its first $100 million institutional fund soon.
For some firms, portfolio companies stand to be the focus of attention.
“Without an IPO market and a very little M & A; activity, a lot of VCs don’t have the ability to see liquidity on their investments,” said Yurkovich of Forrest Binkley & Brown. “So what VCs are forced to do is carry their existing portfolio of companies for the next year or two until the market turns around.”
Venture capitalists said they hadn’t expected the technology bubble to fizzle out so quickly. Most of them were betting that the tech boom would go on until 2002 or 2003. Others predicted the tech and Internet expansion would run for a decade or so.
Now venture capitalists have portfolio companies that continue to lose money. One of the reasons venture capitalists aren’t investing is they are preserving cash to service their existing portfolio companies.
“The overall funding has slowed down and many venture firms are finding it difficult to raise second and third rounds of funding for their portfolio companies,” said Rudin of Riordan Lewis. “We better keep $6 million to $10 million for later rounds, rather than $5 million. Every VC has to support his existing portfolio of companies.”
“There hasn’t been lot of activity in new investments,” Yurkovich said, “although there has been fair amount of investing in existing portfolio companies to make sure that they will be viable when the market turns around.”
But still, there are deals to be made, venture capitalists said.
Walter Schindler, chief executive at Odyssey Strategic Partners LLC, said he believes now is the best time to invest, with company valuations lower than they were a year ago. His firm has backed 12 early-stage companies in as many months, he said.
What have changed are expectations, Schindler said
“No one is expecting Internet-level returns of 1999,” he said. “Institutions are expecting anywhere from a 25% to a 65% (internal rate of returns) on an early stage VC.” n
