Seattle venture capitalists are feeling much more optimistic these days. But the second-quarter venture capital numbers – released in two separate reports this week – don’t necessarily reflect theupbeat attitude.
The number of Washington start-up companies that attracted venture capital fell to the lowest level in six years while the amount of money invested declined on a quarter-by-quarter basis.
Sixteen start-up companies – led by board-game maker Cranium and biotechnology incubator Accelerator Corp. – raised $82.6 million in the second quarter, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey. That’s a 33 percent decline over the prior quarter and a 64 percent drop over the same period last year. Washington, ranked sixth in venture capital in the second quarter of last year, fell to the 10th slot behind Pennsylvania, Connecticut and North Carolina. California, the biggest beneficiary of venture capital, attracted $1.9 billion or 44 percent of the total.
The Ernst & Young/VentureOne U.S. Venture Capital Survey did not shine a ray of hope on the situation. It tracked only 13 companies that raised $82.4 million, a 45 percent decline over the first quarter.
Nationally, both reports showed a slight uptick in venture capital investments with about $4 billion raised during the quarter. Economists believe the industry, with an estimated $75 billion in untapped capital, may have finally bounced off the bottom after two years of declines.
“While these numbers don’t show a clear up trend, they have definitely stopped falling,” said Jesse Reyes, vice president at Thomson Venture Economics.
The slowdown in activity in Seattle comes at a time when many local venture capitalists are busy working on new deals and expressing optimism about the future. They said the 33 percent drop could be an anomaly.
“Part of the aberration that you see is that the statistical sample is small,” said OVP Venture Partners’ Chad Waite. “With our number size, you get really skewed by big deals.”
That occurred in the first quarter when Seattle-based Corus Pharma scored $40 million.
Jonathan Roberts, a partner at Ignition, agreed.
“You find it to be a little bit of an episodic business where you might work on something for a long period of time and then you get a clustering of deals that arbitrarily seem to happen in close proximity to each other,” Roberts said. “It is hard to note this quarter-by-quarter up and down.”
As far as Roberts is concerned, things are looking up. Ignition plans to back just as many new deals this year as last. It has feelers out on 10 promising start-up companies with plans to do six new deals this year.
“Within our own operation, we are feeling quite active and pretty encouraged,” he said.
Northwest Venture Associates’ Robert Wolfe, whose firm was the most active local investor with five deals, also is optimistic.
“We think things have come back to a point where it is fairly balanced,” Wolfe said. “We are not seeing an end to the world, that’s for sure.”
The recent uptick in the stock market has buoyed the spirits of many venture capitalists, Wolfe said. That’s because a rise in the public equities markets not only can open doors for initial public offerings and acquisitions – the two primary ways that venture capitalists make money – but it also can lead to increases in corporate spending. If large corporations open their pocketbooks, that usually translates into a positive effect on venture-backed start-up companies that sell everything from routers to software.
David Billstrom, a venture capitalist at FBR CoMotion Venture Capital in Seattle, said the corporate spending climate is improving. Nearly every one of his portfolio companies is experiencing increasing revenues.
But Billstrom, who could not recall the last new investment that he made, remains cautious.
“There are two issues, one is the quality of businesses and the second is the possibility of exits,” Billstrom said. “We see good ideas, but the problem from our point of view right now are that the exits are uncertain.” Only two venture-backed companies completed IPOs last quarter, and the number of venture-backed acquisitions was flat at 63, according to VentureOne.
Another problem plaguing the industry is the lack of early-stage financing deals. The number of first-time financings hit an eight- year low in the first quarter and increased only slightly in the second quarter, according to the MoneyTree Survey. In Washington state, only five of the 16 companies that received money were considered early-stage.
For OVP’s Waite, that’s bad news.
“That tells me that people – at least Washington venture capitalists – the bulk of what they are focused on is the maintenance of their existing portfolios,” he said.
OVP did not make any new investments in the second quarter, though Waite said “we are spending the bulk of our time looking at new opportunities right now.” A new deal is expected to close in the coming days and the firm is on pace to make about four new investments this year.
“One advantage we have now is that we can take our time to close a project,” Waite said.
“We don’t have to make up our mind in the first 25 minutes of looking at a deal.”
WASHINGTON VENTURE CAPITAL INVESTMENTS
Second quarter, 2003
NAME CITY INDUSTRY ROUND AMOUNT
Cranium Seattle Media 1 $21,000,000
AcceleratorCorp. Seattle Medical 1 $15,750,000
BainbridgeIndustries Kirkland Semiconductors 2 $8,800,000
IntelligentResults Bellevue Computers 2 $8,000,000
Anawah Seattle Biotech 2 $6,000,000
EsophyX Kirkland Medical 1 $5,000,000
Vykor Renton Software 2 $4,500,000
DSD Communications Seattle Business products 3 $3,000,000
NetUPDATE Bellevue Financial 4 $2, 600,000
MessageGate Seattle Software 2 $2,050,000
Streamcast Networks Bellevue Software 4 $1,200,000
Intrepid Learning Solutions Seattle IT services 1 $1,100,000
TeleSym Bellevue Telecom 5 $300,000
Front Porch Classics Seattle Media 4 $200,000
MidStream Technologies Bellevue Telecom 5 $100,000
Sources: Venture Economics; National Venture Capital Association; PricewaterhouseCoopers
P-I reporter John Cook can be reached at 206-448-8075 or [email protected]
