Venture capital investments in Washington state companies gained slightly in the first quarter, providing a ray of hope for entrepreneurs and investors who have waited three years for the batteredstart-up market to rebound.
Twenty-five companies – a third of which were software start-ups – raised $126.5 million in the first quarter. That compares with 28 companies that raised $124.2 million for the same period last year, according to the PricewaterhouseCoopers/Thomson Venture Economics/ National Venture Capital Association MoneyTree Survey. Investments also increased over the fourth quarter, helped in part by a $40 million deal involving Seattle biotechnology company Corus Pharma.
Although the 1 percent gain can hardly be classified as a return to the euphoric days of the late ’90s, some Seattle-area venture capitalists say the market may have finally turned a corner.
“I wouldn’t put myself on the Chicken Little the sky is falling wagon. And I wouldn’t put myself on the it is all going to get better in the next six weeks wagon,” said OVP Venture Partner’s Chad Waite, whose Kirkland firm was the most active investor in the state in the first quarter. “But I am optimistic over the next year.”
Waite, who most recently invested in Palo Alto, Calif.-based Airgo Networks and Redmond-based Action Engine, said capital spending should increase because companies have delayed technology purchases during the past two years.
“I don’t project it is going to be up 50 percent between now and the end of the year, but I think it is going to become stable and people are going to be spending money,” he said.
Although investments increased in the state, they continued to fall nationally as venture capitalists took longer to evaluate opportunities and continued to suffer from the dot-com hangover.
The $3.8 billion invested in 623 companies represented the 12th consecutive quarterly decline and the lowest investment level in six years, according to the survey. That compares with the high-water mark for venture capital investing when $29 billion was invested in the first quarter of 2000.
“What we have is an industry that is trying to find its right size,” said John Taylor, vice president of research at the National Venture Capital Association.
The number of companies raising venture capital for the first time – a good indicator of investor optimism – hit the lowest level in eight years. Furthermore, half of the 16 industry categories, including software, telecommunications and medical devices, experienced significant investment declines during the quarter. Biotechnology, the hot sector of the past two years, saw no growth as 49 companies raised $490 million.
A second study, released yesterday by Ernst & Young and VentureOne, also indicated a drop in investment activity across the country. Investments declined 21 percent as 404 companies raised $3.4 billion, the study found. But investments increased in Washington state as 19 companies raised $152.7 million. That compares with 15 companies that raised $98.5 million in the first quarter or 2002, according to the study.
Entrepreneurs who are trying to attract venture capital face one of the most difficult fund-raising environments in decades. Not only are venture capitalists taking longer to evaluate new opportunities, but they are re-examining existing portfolio companies that may not have the horsepower to make it through the current slump.
OVP, for example, recently pulled the plug on Mercer Island- based Returns Online. The company, which raised about $9 million in financing, closed its doors earlier this month.
Corus Pharma CEO Bruce Montgomery, who raised $40 million for his 2-year-old biotechnology company in March, experienced several challenges during his six-month fund-raising campaign. One of the biggest was meeting information requests from potential investors who wanted to conduct extensive research on the company. That consumed an extra two months, Montgomery said.
Falling valuations also had an ill effect.
“The public markets in biotech have crashed about 60 to 70 percent and since that is viewed as the exit strategy, the private companies values have gone down too,” Montgomery said. “So the (venture capitalists) are pretty price sensitive.”
Montgomery, whose company is working on a treatment for asthma, was one of the fortunate biotechnology entrepreneurs who secured early-stage funding. Only eight biotechnology companies received first-time funding in the quarter, the fewest in the past seven years.
“The VCs are saving their powder for the companies they already have, rather than starting new companies,” Montgomery said. “They are doing some birth control.”
Montgomery said it was “good news” that there was a slight uptick in venture capital investments in the state.
“It isn’t as much of a nuclear winter as everyone thought it was,” he said.
SNAPSHOTS
Top five deals in the state: Corus Pharma ($40 million), Action Engine ($15.5 million), Consera Software ($8.5 million), Talisma Corp. ($7.2 million) and ClearMedical ($7.2 million).
Most active Washington investors: OVP Venture Partners (five deals), Ignition, Northwest Venture Associates, SeaPoint Ventures, Voyager Capital (each with four deals).
Early stage financings: Bainbridge Industries, Consera Software, Illumigen Biosciences and Pure Networks.
The Pacific Northwest, which includes Washington, Oregon, Idaho, Wyoming and Montana, ranked sixth in terms of venture capital with $187.3 million invested.
The Silicon Valley region attracted the most venture capital as 186 companies raised $1.2 billion.
P-I reporter John Cook can be reached at 206-448-8075 or [email protected]
