Aug. 11–Timing looms large in the mind of every entrepreneur. Ask Larry Genovesi, who’s building a networking company in the aftermath of a networking industry meltdown. Genovesi is president ofAmmasso Inc., one of more than two dozen New England companies that drew early-stage venture capital in the second quarter. And he thinks he’s got the timing right.
“What you don’t want to be is a venture-funded company that has a product to ship now,” said Genovesi, who works out of a former shoe factory in Boston’s Fort Point Channel district. “We’re a venture-funded company that will start shipping product in the first quarter of next year. By then, the recovery will have gained some steam, and we want to ride that wave.”
Many venture capitalists appear to have reached the same conclusion. After two years of playing it safe, placing small bets on the region’s start-ups and young companies, venture firms boosted their funding of early-stage companies in the three months ending June 30, according to the Boston Globe MoneyTree survey. The quarterly survey was compiled by PricewaterhouseCoopers, Venture Economics, and the National Venture Capital Association.
While overall investment in New England companies fell 34 percent from the first quarter to $496 million, funding for early-stage deals climbed almost 50 percent to $110.3 million, the MoneyTree data shows. Early-stage deals accounted for 25 of the 73 venture investments in the region in the April-to-June period. Nationally, where overall venture investing rose 6 percent to $4.3 billion in the second quarter, early-stage outlays jumped 43 percent to $956 million.
“The venture capital firms are getting back into early-stage investing,” said Matthew Littlewood, a Boston-based partner at PricewaterhouseCoopers. “The dust is settling, and the VCs are able to turn their attention to new companies as opposed to tying up their money in older companies that may or may not make it.”
While venture firms continue to pony up money in later-stage rounds to help companies that have hit rough spots, many start-ups from the dot-com era have folded or been sold off by now, Littlewood said.
Among regions, New England has long been the second-strongest magnet for venture investors, after Silicon Valley, and that trend continued in the second quarter, as companies in the California innovation capital topped the charts by pulling in $1.44 billion. For New England companies, the most recent quarter proved the mirror image of the January-to-March period, when quarter-to-quarter investment continued a three-year slide nationally but rebounded in New England on the strength of some big life sciences deals.
This time, the money flow improved nationally, but dipped in New England where the quarter was marked by the relative absence of larger-scale deals. The region’s top 10 second-quarter deals totaled $211 million, down from $311 million in the first quarter. Littlewood said the decline may be simply a function of when funding rounds closed, ultimately less significant to the future business climate than the pickup in early-stage funding.
But the lack of a clear direction in the numbers reflects the continuing uncertainties of the economy, fueling a debate in venture capital circles. Though few predict financial markets bouncing back to late 1990s’ levels any time soon, a growing number of venture capitalists — though not all — see the beginning of a turnaround.
“People believe we have hit the bottom, and they’re willing to invest in something new,” noted Michael Feinstein, senior principal at Atlas Venture in Waltham, which did eight financing deals in the second quarter.
“Once the economy finds the bottom, companies figure out how to operate in that environment, how to be profitable.”
But the skeptics cite rising interest rates and the stubborn refusal of businesses to make capital investments.
“No one’s spending any money,” lamented Randy J. Henderson, general partner and chief financial officer of Spectrum Equity Investors in Menlo Park, Calif., which does expansion-stage financing.
“Looking at our portfolio companies and their revenue growth, they’re inching up, inching up. I don’t see a recovery that’s imminent, despite what the economists say.”
For venture capitalists, as for entrepreneurs, the critical issue is timing. The modest increase in money flow notwithstanding, much of the investment capital raised by venture firms in recent years remains on the sidelines. Michael Krupka, managing director of Bain Capital Ventures in Boston, estimated that $20 billion will be invested across the country this year, while two to three times as much will be held in reserve by venture firms waiting for more promising deals or a more promising business climate.
Into that wait-and-see environment steps a new class of entrepreneurs, chastened by the excesses of the dot-com era.
“We have very modest quarters,” said Andy Levine, president and chief executive of GI Dynamics in Newton, which secured $4.1 million in financing this spring to develop a new approach to treating obesity. “We’re going to spend money on product development and market development, not foosball tables.”
Venture investors these days see few tattooed college dropouts with half-baked business plans among the new crop of entrepreneurs — and fund even fewer.
“In some ways, it’s the old crop of entrepreneurs,” said Michael Carusi, general partner at Advanced Technology Ventures in Waltham, which co-led the funding round for GI Dynamics and did a total of 11 deals in the second quarter.
“It’s people who have been there and done it before. They’ve been out of the game for a while and are ready to return.”
Levine, for instance, is a veteran of the medical devices business who helped start Microsurge Inc. in the 1990s and has spent the last few years managing Seedling Enterprises LLS, a business incubator that created and provided early funding for GI Dynamics.
Genovesi and his senior executive team at the Boston clustered networking company Ammasso (the Italian word for “cluster”) worked together previously at Network Engines. Cheng Wu, chairman of Acopia Networks, a Chelmsford company that raised $30 million in venture funding in the recent quarter, formerly led ArrowPoint Communications, which was sold to Cisco Systems in 2000. Christopher P. Lynch, the president and chief executive of Acopia, was an executive at both ArrowPoint and Cisco.
Such industry veterans are well aware of the tighter purse strings and understand new customer priorities, though they remain on the lookout for untapped markets. Businesses buying any kind of technology products or services, from software applications to networking gear, want assurances their purchases will help them manage resources more efficiently and lower operating costs, said Brendon Howe, Acopia’s vice president of marketing and business development.
“Customers are focused on immediate projects that generate immediate return on investment,” Howe said.
Acopia has signed up five beta customers to evaluate its next-generation network switch, which aims to improve data flow by communicating better with the applications requesting data. Ammasso’s technology seeks to boost the performance of computer clusters by enabling them to run over standard ethernet. GI Dynamics is preparing a less invasive alternative to gastric bypass surgery for combating obesity, using technology to address an emerging market opportunity.
Venture investors like the focus on customers and on products and services that help customers boost profits. And they feel more comfortable funding industry veterans.
“You’re getting companies with more seasoned management teams,” Littlewood said. “They’ve probably got more chance of succeeding because they’ve got achievable business plans and realistic goals.
“And, frankly, in this kind of environment, you really have to know what you’re doing.”
Feinstein agreed.
“If you look back at the dot-com era, the business models were based on eyeballs,” he recalled. “We don’t see anything that goofy these days. The overall capability of the teams is very high.
“People really understand now that capital efficiency is very important. People understand that coming in the door.”
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