Businesses looking for money to help them grow shouldn’t pin their hopes on venture capital, although the outlook is not totally bleak, according to a lawyer who specializes in venture capital fortechnology companies.
The high-tech bubble has long burst, and the numbers for venture capital investment reflect that, said Scott Townsend, junior partner at Hale and Dorr LLP, a Boston-based law firm that does extensive work in venture capital.
“2000 was a `bubble’ year,” Townsend told about 50 people at Deal Flow, a luncheon put on by the Hampton Roads Technology Council. “And the venture capital financing statistics for that year reflect the Internet-driven investment frenzy of the period.”
Venture capital investing in Virginia that year totaled $2.4 billion, but dropped to $858.6 million in 2001 and $361.3 million in 2002.
Not only has the tech sector cooled, but the economy as a whole has slowed down, Townsend said.
He also pointed out that “venture capitalists are being very selective, particularly in the telecom and networking sectors.”
One tech sector, however, is showing signs of improvement this year: software. Townsend said software companies are attracting attention because it appears that U.S. businesses will spend more on software, as opposed to equipment or facilities. Also, software companies are seen as a less-risky investment because they need less cash to fund operations than other types of tech firms, he said.
Dale Bennis, president and CEO of TravElements, was glad to hear that. His company provides Internet commerce tools for the travel and tourism industry. His clients, such as Busch Gardens, use these tools to offer vacation packages on their Web sites.
Bennis said he was interested in the software investment numbers in the presentation. For example, $113.2 million was invested in software for the first three months of this year in Virginia, Washington and Maryland, Townsend said.
“If your software is in a fairly safe marketplace, it’s a safe investment for venture capitalists,” Bennis said.
While venture capital investment increases excite Bennis, he is not sure that his business, which started in 1999, is mature enough to receive funding, because trends point otherwise.
“We are just starting to make enough money to be noticed by venture capitalists,” he said.
Bennis said he’d have to continue building TravElements the old fashioned way, “with a boot and a prayer,” he said. He feels the market is too difficult right now.
“It’s a big distraction to market to venture capitalists when it might be better to get two or three more customers,” he said.
Townsend’s presentation confirmed Bennis’ fears.
“Seed and first-round financings continued to decline as a percentage of all venture capital financings in the U.S.,” Townsend said. Venture capitalists are putting more emphasis on later-stage companies that have proven ability to earn revenue.
Townsend pointed out a few favorable trends.
“It seems that many venture capitalists are actively looking for new investments in companies that have great technology, a compelling business plan, a strong management team and a large addressable market,” Townsend said. Also, an increasing number of outside investors are bringing capital into Virginia.
One study showed that 62 percent of all deals conducted during the first three months of this year in Virginia, Maryland and Washington had at least one non-local investor.
“This statistic reflects that our region is producing emerging growth technology companies that are attractive investment opportunities,” Townsend said.
Townsend said that in addition to the software market increases, venture investments in storage and security will increase.
The boost will come in light of national security, government contracting and defense-related companies. Though venture funds may increase for those types of businesses, they may not for others, he said.
“Some great companies will not get funding as deals go down,” Townsend said.
Williams Mullen, a law firm with offices in Newport News, Norfolk and Virginia Beach, sponsored the luncheon Thursday at the Norfolk Airport Hilton.
Reach Cherise Williams at 446-2318 or cherise.williams(AT)pilotonline.com
