You can almost count them on your fingers.
The number of venture capital deals in Orange County has almost dried up and only a few companies here got lucky in the first quarter.
Only 14 OC-based companies got venture funding in the first quarter, according to the PricewaterhouseCoopers LLC Money Tree Survey done in partnership with Reuters Group PLC’s VentureOne. The survey also said that the total funding received by local companies dropped almost 50% from the fourth quarter, to $94.4 million.
For the third straight quarter now, venture capital investments have slowed in OC and elsewhere in the country. Twenty-three OC companies received venture funding in the second quarter of last year, when venture investment in local firms peaked. That number dropped to 16 in the third quarter and 14 in the fourth quarter.
But while the funding was low, a few companies that have the right product or business model received backing. Irvine-based VSK Photonics Inc. managed to get some big names in the venture industry to invest. The company, which makes components for fiber-optic telecommunications, received $18 million in an initial round of funding in the quarter. Menlo Park-based Morgenthaler Ventures and Intel Capital invested in the company.
Also, dot-com and Internet-related companies no longer are the top picks of venture capitalists. Eight of the 14 companies had nothing or very little to do with the Internet. Huntington Beach-based TeamFuel Inc., a fuel procurement and supply-chain management company closed a $5.5 million round of funding.
Five companies that received funding are in the healthcare sector, while three are in the semiconductor business. Six of the start-ups are headquartered in Irvine. Seven companies received their first round of funding, while only one company had its third round closed.
The first quarter drop in venture capital funding was even sharper when compared with the second quarter of last year, when OC funding hit a record $264 million. Funding in the most recent quarter was lower by 64% vs. that high-water mark.
The drop, although significant, is not alarming, observers say. Venture funds are reluctant to finance early-stage companies while the stock market remains lackluster. Also, U.S. corporations are spending less on technology than they did a year ago, thus making it more difficult for start-up companies to survive.
While local venture funding continued to fall from its 2000 peak and was down from the fourth quarter of last year, the first-quarter total still is up 10% from the year-ago period. Back in the first quarter of 2000, 13 OC companies landed $86 million in venture funding.
And the survey doesn’t capture all the funding that takes place in OC. Several local companies received money from corporate backers or other investors and aren’t included in the survey. Also, some start-up companies prefer not to disclose their funding for competitive reasons.
Still, the reported first-quarter decline is in line with a tightening of venture purse strings in the wake of the dot-com meltdown and a lackluster market for initial public offerings. U.S. venture funding fell 39% sequentially and 61% year-to-year in the first quarter.
The glorious Internet boom, which turned into a spectacular bust, is having a measurable effect on OC tech start-ups that are looking to raise money. With the public markets in bearish territory and valuations of technology companies down, venture funds are cautious.
Worse still, companies here saw their average deal size come down sharply in the quarter. On an average, a company here received $6.74 million, down from $13.13 million in the fourth quarter, but slightly up from $6.6 million in the third quarter.
On a national level, 692 companies were funded in the first quarter, and the average funding was $14.59 million down, from $15.93 million in the fourth quarter and $16.61 million in the first quarter of 2000. n
