Venture capital still fuels start-ups

PHOTO/Courtesy Alaska Railroad Corp.
U.S. venture capitalists have made investments of $31.6 billion so far this year, including $1.8 billion in November. A total of 454 companies have been funded in the past two months alone. The venture capital industry, despite reports of doom and gloom, is still fueling start-ups and fast growth all over the country.

Let’s have a look at some of the deals that occurred on Dec. 3:

American Capital Strategies pumped $31 million into Numatics, a provider of pneumatic valves, air filters and motion control devices in Highland, Mich. Advent VP and Warburg Pincus invested $15.1 million in Netik, a provider of end-to-end electronic business and straight through processing solutions for the financial services industry. Kennet Capital Ltd. led a second-round infusion of $8 million for CascadeWorks, a San Francisco provider of enabling services for e-procurement. These funds were for continued market penetration and fast growth. Three companies, Zero Stage Capital, Pennsylvania Early Stage Partners and Sodexho provided third-round funding of $3.25 million for the software firm Gazelle Systems of Newton Upper Falls, Mass.On Nov. 30, Genscape Inc., a provider of energy information services out of Louisville, Ky., received its first-round funding of $3.55 million. Chrysalis Ventures led the investment with other venture capital, Angel and industry partners.This one deal alone serves to dispel a few venture capital myths that have started this year: Myth 1: If you don’t live in Silicon Valley there is no venture capital money; Myth 2: Venture capitals don’t do deals with angels or industry partners; and Myth 3: No first-round funding is being done.So who are the major players? The top investors over the last 90 days have been New Enterprise Associates with $381.7 million; Oak Investment Partners, $338.5 million; Bessemer Venture Partners, $261.6 million; Centennial Ventures, $227.4 million; and Mayfield Fund, $216.8 million.Where is the money going? The top industries are still software companies and firms that provide Internet or networking services, but there is also a strong interest in biotech and telecommunications, especially broadband and wireless companies. You may be surprised to hear that venture capitals are still investing in e-commerce companies and the retail industry.Northwest Venture Associates in Spokane, Wash., is a great example of a venture capital firm succeeding in today’s market conditions. NWVA invests in solid companies with a lot of potential. They need not be the next venture capital home run. They don’t look for returns of 100 or 1,000 times their investment, as many venture capital firms have done over the past few years.The old rule of thumb of a five to 10 times return works well for them. This year they have invested in a chain of veterinary clinics, a high-end retail outlet for gourmet cooking utensils and a manufacturer of nostalgic children’s games.NWVA’s first fund had a net internal rate of return of more than 20 percent; its second fund had a net internal rate of return in excess of 50 percent and raised a third fund last year of $150 million. What’s their philosophy? They look for real businesses serving real customers with real needs.One of the other myths prevalent this year is that venture capitals can’t raise money. Yet Trivest Inc. of Miami has just announced the closure of its third fund with $316.1 million in committed capital. Trivest specializes in buy-outs of firms in the $30 million to $150 million range. This type of investment firm is crucial to the exit strategies of venture capitals who concentrate on seed and first-round funding.In a survey of venture capitalists conducted by Dee Power and Brian Hill, authors of the book "Inside Secrets to Venture Capital," they found that many venture capitalists view the current investment environment as one of the best times in recent years to raise money for entrepreneurs because it is a lot easier to get noticed. It seems the old adage that there is a lot of money chasing a few good deals still holds true.Venture capitals in the survey argue that since entrepreneurs have had to face more realistic valuations, there exist tremendous opportunities for investments in better companies at much lower costs. The survey found that 77 percent of the venture capitalists questioned said the quality of companies has improved over the last 12 months.The most common reason given for an improving investment environment was that there has been a tremendous amount of capital raised that needs be invested, and, as current portfolio demands lessen, more time will be devoted to new investments.So what advice do venture capitals give to companies searching for capital? Have a strong business model with a well-thought-out business plan and get a good management team. Build your company as if you were in a marathon, not a sprint. Show that you can attract paying customers, rather than demonstrating vague notions of customer existence, and then bootstrap your company to get as close to positive cash flow as possible.Now where have we heard this before?Bruce Borup is assistant professor of entrepreneurship at Alaska Pacific University. He can be reached via e-mail at ([email protected]).
12/16/2001 - 8:00pm