Steve Oakley felt confident going into his first round that he could get funding for his Seal Beach-based Commerce Scout, a business e-commerce play that helps companies use the Internet for procurement.
But his bravado disappeared in Nasdaq’s March meltdown. Oakley got pretty nervous about getting a second, high-profile investor to go along with already-committed Edgewater Funds of Newport Beach. After some tense weeks, Weiss, Peck and Greer of San Francisco came aboard.
But by the time the deal was finalized in late May, other VCers had started coming out of the woodwork.
“We had to say ‘no’ to some top players,” he said. “We felt confident that the round could have been as large as $15 million, but … all we needed was $6 million to validate our models.”
There’s a buzz among Orange County executives and VCers: the worst has passed and the game is picking up again.
In recent weeks, some large fundings have been announced: $20 million for Buyproduce.com, $40 million for WWW.com and $25 million for firstsource.com.
Meanwhile, Irvine-based Kawa-ma.com, formerly Learning for Success, was about to close $30 million in second-round funding as of late last week. Kawama.com spokesman Greg Zerovnik declined to identify the investors, except to say that one is a major national player recognized in the education industry. The company is a B2B play that aims to be a “buyer-centric/vendor-neutral” portal in the education procurement industry.
“We seem to be in an area where the VC people are still very interested,” Zerovnik said. “The Kawama commerce B2B is still very attractive in a lot of people’s eyes.”
E/techsupport.com, an Irvine-based firm, is looking for about $10 million in funding. Asked whether the VC market is ready, founder and CEO Marci Salas smiled readily, saying, “There’s a lot of interest out there.”
At least another two high-tech companies requested that their names be withheld because they are in the midst of obtaining financing.
“Call me in two or three weeks when we close the deal,” said one CEO.
Trolling for Capital
Several factors could be contributing to the rebound in VC funding. For one thing, this is the time when VC activity traditionally increases in anticipation of the end of the fiscal year. Also, with the IPO market still in the freezer, executives who were counting on the public market to raise capital instead need to get another round of private funding. To do so, they have to accept lower valuations than they likely would receive in a public offering, which means there are more bargains out there.
By most accounts, the VC investors are not yet taking their summer vacations. In April, Crosspoint Ventures invested $18 million in Irvine-based Access360, which provides programs that enable a company to manage which employees, managers and contractors can access its e-business.
“We are fairly close to funding a new project in Orange County,” said Eric Harrison, an Orange County partner in Crosspoint Ventures. “We’re 30 days away from making a $20 million investment.”
Another VC investor, Mark McManigal, a partner in the Newport Beach office of Edgewater Funds, said he’s considering investments in three OC companies.
Viable Market
“There’s still a very viable market for venture investing,” McManigal said. “We’re looking at a lot of different companies which are infrastructure plays. The market has gotten tougher to raise money, but there will be some opportunities.”
The dot-coms have taken a particular drubbing. Harrison said their problem is that they are “relatively low- tech.” He noted there are more dot-coms in Los Angeles, so that area’s been harder hit than Orange County.
“The venture community is more selective now than 90 days ago. The frou-frou dot-coms that were making it into the public market as recently as eight to 10 months ago have no chance of getting venture funding now. It rules out an entire tier,the B2C side,” he said. “The reality is any good company with interesting, differentiated technology combined with strong management will get funded in this market.”
Among some companies seeking capital, there is a renewed sense of confidence. For example, Irvine-based Digital Tempest, which landed $5.7 million in funding in February, is back on the street looking for second round funding of $10 million to $20 million.
“It’s difficult if you’re trying to get funding for a pet site or retail e-commerce. But in terms of infrastructure plays, funding is readily available,” said Ron Gill, VP of sales and marketing for Digital Tempest.
By next fall or spring, Commerce Scout’s Oakley expects to go back for another round, this time looking for $20 million.
“I’d be nervous if there was declining momentum, but I believe that any young company in a good space with a good product and a good team should be able raise it,” he said. “The money hasn’t gone away. It’s just gotten pickier.” n
