Venture capital
totals strain the
imagination
BY SHAWN NEIDORF
Mercury News Staff Writer
It seems incredible that venture capitalists invested
$13.5 billion in 1,153 deals with local companies
last year -- about $1,940 for every man, woman and
child in the nine-county Bay Area.
But it's even more incredible to realize that this
record amount doesn't fully count some of the
fastest-growing sources of venture capital:
corporations, buyout funds, investment banks and
financial corporations.
PricewaterhouseCoopers, which compiles the
Money Tree data with the Mercury News, plans to
survey these non-traditional sources of venture
money sometime this year, but hasn't started yet. So
far, it has collected numbers only from traditional
venture capitalists and includes non-traditional
investments whenever the VCs mention them. In the
past, corporations have been less willing to disclose
their investments than the venture capitalists
themselves.
It's uncertain how much these fast-growing figures
would add to the quarterly totals, but another VC
research firm reports that corporations invested $2.8
billion in Bay Area companies last year. This was
nine times what they invested here in 1998,
according to Venture Economics, a venture capital
data collector in Newark, N.J.
Some -- but not all -- of this is captured in the record
$13.5 billion in venture capital reported by the
Money Tree for last year, nearly a 200 percent
increase from the $4.5 billion invested in the Bay
Area in 1998. In the fourth quarter alone, the venture
investment rose from $1.2 billion in 1998 to $5.7
billion in 1999.
In addition, the average local deal size also doubled
in 1999, to $11.7 million from 1998's $5.8 million.
And a few mega-deals drove up the average, such as
$275 million for Foster City-based Webvan Group
Inc., $200 million for Brisbane-based Colo.com, and
$175 million for Santa Rosa-based Advanced
TelCom Group Inc.
Nationally, venture capitalists unleashed an
astounding $35.6 billion last year, disbursing it in
4,006 rounds of funding for young companies. That's
a major leap from the previous record of $14.2
billion invested in 1998, according to the latest
MoneyTree report.
As usual, the nine-county Bay Area attracted the most
money of any region, followed by New England,
which raised $4.1 billion and the New York
metropolitan area, which raised $2.5 billion.
As in 1998, local software companies took the
largest share with $3 billion in Bay Area
investments. The networking and equipment sector,
telecommunications industry and business services
each drew about $1.6 billion, reflecting venture
capitalists' intense interest in the Internet.
Corporations, which are among the largest of the
important non-traditional VC sources, have been
particularly interested in seeding companies that will
help meet strategic more than financial objectives.
Traditional VCs, on the other hand, invest money
strictly to make money, and the different goals is part
of what can form complementary relationships
between venture capitalists and non-traditional
backers.
For traditional venture capitalists and the companies
they back, non-traditional investors, especially
corporations, can be an asset -- beyond the dollars
they provide.
They can offer young companies access to potential
clients who already buy products or services from
the corporation as well as assistance with marketing
and distribution. Big-name backers also lend the
cache of their name to the start-up, a kind of
endorsement.
On the other hand, some corporations also can be
slow to decide whether to invest and may not
``support' the portfolio company with additional
funding in subsequent rounds because the initial
investment satisfied the corporation's strategic goal
of getting access to a new technology. Corporate
investors also have been accused of driving up deal
prices as they are less price sensitive than financial
backers.
They can be challengers to venture capitalists,
particularly as VCs who traditionally stuck to
earlier-stage investing have raised larger funds with
the idea of parking more money in their portfolio
companies' later rounds.
Leading corporate venture investors include Intel
Corp., which invested more than $1 billion last year,
typically committing $1 million to $10 million per
company, and Cisco Systems Inc. of San Jose. Cisco
has been making venture investments for six years
and backed almost 30 companies in 1999, up from
about 15 the year before. Mike Volpi, the senior vice
president who oversees Cisco's investments,
acquisitions and alliances with emerging technology
companies, expects to invest in 40 to 45 young
companies this year.
In San Francisco, meanwhile, oil company Chevron
Corp. initiated a venture program last year. Donald
Paul, who began advocating for venture investing at
Chevron for two years, now oversees the $60
million program that was created in mid-1999.
Chevron Technology Ventures looks for new
technologies that could be adapted for oil industry
use, such as improved processes to separate fluids.
By the end of last year, Chevron had invested in five
venture funds as a means of gaining access to deal
flow and a network of contacts. Chevron also
invested $2 million each in three companies: San
Mateo's Harmony Software Inc., San Diego-based
Illumina Inc. and OuterLink Corporation, a Concord,
Mass. company.
OuterLink, for example, supplies tracking and
instant-messaging systems for fleets of vehicles.
Chevron uses the system for its helicopters that serve
offshore platforms in the Gulf of Mexico.
Though corporations traditionally have trimmed their
venture activities in less ebullient economic times,
flowing in and out of the market with the tide,
PricewaterhouseCoopers' Walden, expects they're in
the venture business to stay in some form.
``They cannot afford to miss the opportunity of
outsourcing their R&D,' Walden said. ``They're
going to be in this market in one way or another for
the foreseeable future.' Just as corporations were
increasing their venture participation in 1999,
buyouts firms were doing the same, though with
financial goals more like those of venture capitalists.
Last year, buyout firms made cash-for-equity
investments in Bay Area companies totaling $762.1
million, nine times what they invested in 1998,
according to Venture Economics.
Executives at Kohlberg, Kravis & Roberts, a
well-known New York-based buyouts firm, began
investing in early-stage Internet companies several
years ago, starting MyPoints.com.
Watching the Internet evolve, they realized it would
affect every business, ``and therefore both
understanding and participating in it is important,'
said Marc Lipschultz, who oversees KKR's venture
investments.
KKR's current buyouts-focused fund is $6 billion,
too large to make $5 million venture investments.
That's why KKR's Internet deals have been done
with money from the firm's executives. The group has
not decided whether to raise a fund structured for
venture investing, but KKR remains interested in the
Internet, Lipschultz added.
Bank-related VC operations like Chase Capital
Partners also are very interested in the Internet.
Chase Capital, the venture capital unit associated
with Chase Manhattan Corp. is in its 17th year of
investing, looking first for financial gains but also for
``linkages' beneficial to the bank.
Investment banks and financial corporations,
meanwhile, put $107.7 million to work locally in
1999, up from $15.3 million in 1998.
The effort has been lucrative for Chase; in the last
quarter of 1999, Chase Capital Partners' gains,
(including unrealized gains), accounted for almost
half of the parent organization's operating profits,
said Chase Capital General Partner Shahan
Soghikian. But he was quick to note that exits from
two major investments accounted for much of the
group's year-end contribution; for the year as a
whole, Chase Capital accounts for more like 25
percent of operating profits, Soghikian said.
The organization invested $2.3 million in private
equity opportunities -- including venture capital and
buyouts deals -- and is on pace to do the same this
year. |
