Venture Investors Were ‘Capital Managers’ in Q1
By RAJIV VYAS
Venture capital firms in Orange County did not do much investing in the first quarter. And, where they did, it mostly was in healthcare, security and even construction companies, according to this week’s Business Journal’s list.
Half of the firms on this year’s list remained on the sidelines by not investing any money in the most recent quarter. The other half put $37.3 million into Orange County companies during the period. The list ranks 20 venture firms operating here by the amount invested in the first quarter. It includes venture firms based here as well as those with offices here. The list doesn’t include investments in OC companies made by firms that don’t have offices here. Nor does it tally investments made by out-of-area offices of OC-based firms.
This year’s list marks the second in a row in which many venture firms have refrained from investing in the wake of the technology downturn. But it’s not for lack of money, local venture capitalists say.
“The amount of money available has been as great as it has ever been,maybe even greater,” said Malcolm Green, president of No. 18 Newport Beach-based Transmeridian Capital Corp. Venture capitalists “have been very cautious because of the dot-com fiasco.”
Transmeridian, which invests in technology, medical and other companies, was among those that sat out in the first quarter, as well as the fourth quarter. It has $3.5 million in funds under management.
Even with the cautiousness, first-quarter investments in OC companies were up 58% from the fourth quarter’s $23.6 million. But first-quarter investing was off 17% from the $45 million of the year-ago period.
“Venture firms are in a state where they want to emerge from this slow investing cycle,” said Dan Bassett, venture partner at No. 16 Costa Mesa-based InnoCal Venture Capital. “But they are having a tougher time getting the momentum back.”
InnoCal, with $175 million in funds under management, didn’t make any investments in the first quarter and invested $3.5 million in the fourth.
But venture capitalists still have been busy. InnoCal, for one, raised $100 million in 2000. But it has invested only $20 million of that so far.
No. 12 Newport Beach-based Forrest Binkley & Brown raised more than $60 million for its fourth fund late last year but still has yet to start investing the new money.
In all, OC venture and private equity funds are sitting on more than $1 billion in recently raised cash.
“Generally, the mood continues to be cautious,” said Ralph Sabin, managing director of No. 9 Encino-based Pacific Venture Group, which has an Irvine office.
Venture capitalists are focusing on “intelligent preservation of capital and that requires managing existing portfolio companies,” Sabin said. “We are making sure that we have adequate reserve for future needs and that requires closely managing burn rates at portfolio companies. It is capital as well as time management.”
Topping this year’s list is Huntington Beach-based ASRI LLC, which invested $15 million in the first three months of the year, up from $10 million in the fourth quarter and the same amount in the first quarter last year.
That was twice the amount invested by No. 2 Domain Associates LLC. The Laguna Niguel office of the Princeton, N.J.-based healthcare investor put $7.5 million into local companies in the first quarter.
ASRI didn’t say how many deals it did in the first quarter or cite the companies in which it invested. But Steve Kumar, the firm’s chief executive, said biotechnology and energy companies with intellectual property rights is where he is focusing his investments.
Domain has $1 billion under management. Its recent OC investments include: Cardiac Science Inc. and IntraLase Corp., both of Irvine.
Another healthcare fund, Versant Venture Capital, came in at No. 3 with $7 million in first-quarter investments. The Menlo Park-based firm with a Newport Beach office raised $400 million for its second fund late last year.
The Irvine office of Los Angeles-based Riordan, Lewis & Haden came in at No. 4 with its $2.5 million in investments. By strict definition, Riordan is not a venture fund and considers itself a private equity fund. Riordan’s portfolio includes Irvine-based networking company Axcelerant Inc., Mission Viejo-based network security company Foundstone Inc. and San Juan Capistrano-based assisted living operator Silverado Senior Living Inc.
The top five firms invested more than 90% of venture money accounted for on the list.
Another reason why first-quarter funding was lower is because firms are working on prior investments in companies that have hit troubles, according to InnoCal’s Bassett. That makes them reluctant to add more startups to their portfolios, he said.
“The bar is certainly very high,” he said. “The early stage deals are still finding it tough to get funded. Raw ideas are having tough times. The deals that are getting funded are companies that are a little further down the road.”
Few technology companies were funded in the first quarter as firms looked to healthcare, real estate, construction and other old-line sectors.
Riordan, Lewis, which topped the list last year, saw the steepest decline in its local investment activity. The firm saw a 79% decline in the first quarter vs. the year-ago period.
While investments by venture capitalists create jobs, the firms themselves have been employing fewer people. The 20 offices reported employment of 88 people,down 11% from a year earlier. ASRI had the most workers at 15.
The 20 venture firms saw companywide funds under management decline by 7% to $5.9 billion from a year earlier. No. 11 Investar Capital Inc. of Santa Clara with an office in Irvine had the biggest decline. The firm is managing $500 million,down 50% from last year.
ASRI also had a similar percentage decline: its funds under management fell by half to $100 million.
But Versant Ventures more than doubled its funds under management. Its funds grew to $650 million,up 141%.
In percentage terms, No. 5 Lake Forest-based Gold Coast Venture Capital Inc. had the second biggest increase. Its funds under management grew to $6 million, up 50% from a year ago.
Forrest, Binkley & Brown saw its funds under management grow to $300 million, up 20% from the year ago level.
