Jul. 28–The rise-and-fall story has an all-too-familiar ring in Washington state when it comes to venture capital.
If you chart VC investing over the past five years, what you get is a picture that resembles Mount Rainier. Enrique Godreau, a managing director at Voyager Capital, said that’s the running joke at his company’s Seattle offices, where the snow-capped mountain can be seen on a clear day.
The second quarter of 2003 provided no relief. According to the Ernst & Young/VentureOne U.S. Venture Capital Survey, which is to be released today, venture investing in Washington continued its descent from its peak three years ago.
The figures show investors funneled $82.4 million into 13 Washington technology companies during the quarter, a 45 percent decline in dollar value from the first quarter, when 18 companies received $149.8 million.
The decline was even more drastic when compared with the second quarter of 2002, a period that showed $255.5 million going to 30 companies. That quarter, however, was largely an anomaly, with huge investments in the medical-device field.
Nationally, the picture was more promising, although investments increased quarter-to-quarter for only the second time in more than three years. The survey showed 442 companies received $4 billion, a nearly 14 percent increase from the previous quarter’s $3.5 billion (and 424 deals).
That upward tick raised the question of whether Washington’s entrepreneurial community would lag behind the rest of the country — much as the Northwest’s general economy is projected to do.
The question of whether the worst is over is a sensitive one for investors, said Susan Sigl, general partner at SeaPoint Ventures in Bellevue. But how much so depends on their approach to investing.
If they place bets in early-stage companies that are still developing a product, the state of the economy matters less. On the other hand, a company trying to get its products accepted can have trouble if customers aren’t ready to spend, especially when it comes to technology, she said.
Patrick Ennis, a venture capitalist at ARCH Venture Partners in Seattle, contended that over the long term, the technology community’s fortunes are separate from the woes of other industries.
“They are not correlated markets,” he said.
He and other investors also said new ventures don’t look to be acquired or issue a public offering for at least four to seven years, so there’s time for a recovery to boost their prospects.
Janis Machala, managing partner at Paladin Partners, which acts as a consultant to the entrepreneurial community, said the state of the local economy does matter.
“Sure it does. … If companies here locally aren’t spending, it’s hard,” she said. “Oftentimes, the first customers (for a startup company) are close to home. That’s got to have an impact.”
Voyager’s Godreau thought Boeing layoffs and other local economic troubles won’t affect startup financing in the near term because Boeing has not been a large source of spinoff technologies or upper-level management at startups.
“Longer term, I’m concerned about the amount of attention it steals away from the more pressing issues of how we will ensure the health of (information technology),” he said.
For him, Boeing’s troubles are a case of the squeaky wheel getting the grease, while the health of the tech sector gets less attention.
A closer look at the quarterly figures being released today doesn’t reveal many bright spots. Investing levels were comparable to what the area saw in 1997 and 1998. Only two investors, Voyager Capital and Polaris Venture Partners, made more than one investment.
Voyager’s two deals involved Bellevue-based Fidesic and Seattle-based CapitalStream. Fidesic, which provides accounts-payable services to midsize companies, received about $3 million in venture capital. CapitalStream, which helps automate financial institutions’ operations, received $21 million to pay for acquisitions.
Partly hurting the quarter’s performance was a lack of the kind of home-run investments exemplified by the $40 million that went to Corus Pharma, a pharmaceutical-development company in Seattle, in the first quarter.
The largest deal in the second quarter, according to VentureOne, was CapitalStream’s $21 million.
While the numbers largely reflect a continuing slide, some observers think they may not show the whole story.
Laura Puckett, an attorney with Gray Cary who represents many companies and VCs during financing efforts, said at least five deals within her office weren’t included in the partial list of funded companies VentureOne is releasing. (The service had not received disclosure agreements from the others.)
Possibly, she said, companies are unwilling to announce that they did the deals because, among other things, they were bridge loans that will be converted to equity if a formal round of venture capital is raised at a later date.
Puckett added that while the numbers may reflect a downturn, in general she’s seeing more activity locally than she did six months ago.
“Everyone is agreeing that the limbo should end,” she said.
Seapoint’s Sigl said her company, which just raised a pool of investment funds, was more active than the numbers reflected. But its four investments this year all came in the first or the current (third) quarter.
“I don’t think that over time we will lag behind,” she said. “It’s just so obvious we are a technology-based region.”
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(c) 2003, The Seattle Times. Distributed by Knight Ridder/Tribune Business News.
