Venture Adventures on the Horizon
Difficult years for venture capital investments could be easing
The ColoradoanJune 19, 2003
Founders of The Dante Group in Boulder shopped their business plan around to numerous investors in 2001, hoping to find one or several who believed enough in their high-tech software company to help fund the venture.
"We always believed we could get it done, but it took a lot of time," said Pat Maley, Dante's president and chief executive officer.
A year earlier, their search likely would have been less arduous.
The three-year-old Dante Group missed the so-called venture capital bubble in the late '90s when nearly every dot-com with a clever name was awash in venture investments.
From 1999 to 2000, venture capital investments quadrupled from $21 billion to $106.4 billion in the United States.
By 2001, however, most dot-coms had shuttered their offices, sticking VC firms with millions in bad investments.
Venture capital companies cut their losses, retrenched and continue to tightly grip their financial reins.
In the past two years in Colorado alone, venture capital investments plummeted from 121 investments worth $1.4 billion in 2001 to 81 investments worth $546 million last year said Dave Dwyer, General partner of Vista Ventures, a venture capital firm that serves the Front Range from Colorado Springs to Fort Collins.
Gone are the days "when venture capitalists were handing out $10 million checks for drawings on napkins," said Maley, president of The Dante Group, which markets enterprise market soft-war" designed to predict and correct performance problems in information technology processes.
In the first quarter of this year, $3.8 billion was invested in 623 U.S. companies, compared with $4.3 billion in 726 companies in the previous quarter, according to the MoneyTree Survey conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.
Maley said his company eventually found several venture capital firms to invest in, including Vista Ventures. "West Coast firms weren't as interested in doing an early-stage investment like ours in Colorado, but we got good interest from Colorado," he said.
Venture capital funding was essential to Dante's success. "Without it, we would not have gotten there," Maley said.
While capital is still available in Colorado, companies are holding on to it more, afraid of making a bad investment, said Hunt Lambert, director of the Entrepreneurship Center at Colorado State University.
"There is plenty of cash. I just don't see any investments being made," said Lambert, who helped found HorseSportsWorld.com, a Fort Collins-based online business for the equestrian industry and former venture capitalist.
"The criteria is so strict at this point that in fact almost nothing is happening."
HorseSportsWorld.com, a member of the Fort Collins Virtual Business Incubator, tapped into angel funding as part of its base funding, said Kathy Kregel, director of the incubator.
Angel funding is becoming more popular as venture capital remains tight and companies look to establish personal relationships with financial backers.
Angel funding differs from venture capital in that typically it comes from individual investors, Kregel said.
"They are generally people with a lot of money, maybe semi-retired who are interested in financing businesses in areas they are familiar with," she said.
They often fly under the radar, looking for companies close to home, and often have a personal connection with the company or its management.
"They don't put out a sign, they don't get together, they just snoop around," Kregel said. "Deals are suggested through accountants, friends, attorneys. Sometimes the angel investor wants to know this person. It has to be someone they know and trust."
While angel investors might be basing their decisions on emotion, venture capital firms are looking for perfect deals, and "there are not that many perfect deals out there," Lambert said.
Firms are afraid to be the first ones to make mistakes that look like mistakes made in the '90s, he said.
Kregel said the VC market is starting to loosen up "for exceptional companies."
Ideally, those companies are led by experienced entrepreneurs who have started other companies; have a management team that has built other companies; and have a very large potential market, she said.
The criteria are forcing many potential businesses out of the running.
"There aren't a lot of companies around that have all that, but if they can pull those things together, then I understand that the money is loosening up," she said.
None of the eight companies in the incubator have tapped VC funding recently, Kregel said.
So what's a fledgling company to do if it can't get bank funding or VC money?
"Buy a lot of lottery tickets," Kregel said facetiously. "Unless it's an exceptional company, it's really tough."
But a recent survey by Venture Economics, conducted in conjunction with Deloitte & Touche's Silicon Valley Venture Capital Confidence Survev, indicates the Colorado cycle is bottoming out and returning to its roots before the frenzy of 1999-2000.
Fifty percent of those surveyed in January said they expected the VC climate to improve in the state this year.
VC funding nationwide declined throughout the four quarters of 2002, from $65 billion in the first quarter to $4.1 billion by the end of the year.
ITU Ventures, a venture capital firm that invests in early-stage firms focused on early-stage semiconductor and communications businesses associated with research labs and universities, including Colorado State, had invested in five companies over the last two years.
Two of those have been in Longmont.
"We would agree that the VC market in general is fairly tight," said Andrew Murray, principal at ITU Ventures. "Only companies with significant breakthrough technology are being funded. That being said, there is certainly a lot of opportunity in the state for investment."
ITU Ventures, which has provided funding in Colorado since 2001, invests between "a couple hundred thousand to $2 million to $3 million in the early stage" of businesses.
"Obviously, it's not comparable to '99 and 2000, but we are seeing some life back in the venture capital market," Murray said.
"There's a pretty healthy pace of investment in Colorado but the days of funding a business plan with no team and no patents are over."
Murray said later-stage funding is still flat but "at early stages there are opportunities to get funding."
ITU looks closely at intellectual property coming from all universities in the state and participates with CSU's electrical engineering program.
"The better CSU does, the better our company does," Murray said.
Vista Ventures, providing venture capital since fall 2000, made one new investment last month to bring its total to two in two years, said Dwyer.
The company, which invested $3.5 million in The Dante Group and LeftHand Networks of Boulder, has $65 million in fresh capital.
It plans to invest between $6 million and $7 million in Dante and four other ventures in Fort Collins, Longmont, Louisville and Boulder, he said. Another half a dozen potential investments are in various stages of study.
Dwyer defends Vista's track record of two investments in two years, saying "late 2001-02 were very dangerous years to be investing.
Within the next four years, Dwyer anticipates Vista Ventures will have invested the full $65 million in 18 to 20 companies.
But that's a small percentage of the 40 to 50 business plans he gets per month, Dwyer said.
Vista Ventures reviews every plan, looking for a proven management team, preferably one that has worked together before. The product must be a "must-have rather than a nice-to-have," and it should have proprietary technology and target a large and growing market, he said.
"We are not funding brand new things ... it has to be a business that's gotten started in some respects. It can still be fairly early, but at least they have to have a management team in place and a product."
Of the plans Vista sees, half are taken seriously; the other half are missing many of the elements Vista seeks.
The fallout will be that potential companies will start to put together better management teams and stronger business plans, Dwyer said, which ultimately will lead to stronger business.
The National Venture Capital Association reported recently that the $273.3 billion invested between 1970 and 2000 created 7.6 million jobs and more than $1.3 trillion in revenue at the end of 2000.
