SOMETHING VENTURED: Rise In Early-Stage Funding Seen
By Mark Boslet
March 16, 2005 | Dow Jones Newswires/Wall Street Journal
PALO ALTO, Calif. (Dow Jones) - From his sunny offices on Silicon Valley's Sand Hill Road, Ryan Floyd is once again finding irresistible investment opportunities as he sorts through the business plans of young startups.
There's promise in semiconductors for DVD players, television screens using low-power OLED, or organic light-emitting diodes, and devices that turn video into computer-ready digital signals, says the general partner of Storm Ventures LLC.
In 2004, Storm made five investments in early-stage companies. It should complete another five to seven deals this year.
"We're doing a lot of early-stage investing," says Floyd, also a firm co-founder. So, too, are many of his colleagues whose offices dot this leafy artery of the valley's venture-capital industry.
After several cautious years, VCs appear ready again to take greater investment risk. Many say the industry is finally turning a corner. For four years, as they cleaned up the mess of the collapsed bubble, VCs held off placing money into a new wave of early- and seed-stage companies. Now their confidence is up. So is their fundraising. Last year, the first since 2001 to see an increase, 58% of the 170 funds that brought $17.6 billion into the business are earmarked to invest in young startups, according to the National Venture Capital Association and Thomson Venture Economics.
The new money adds up to $9.2 billion, up from $4 billion in 2003. Among the big names putting new funds to work are Benchmark Capital, Draper Fisher Jurvetson, Accel Partners and U.S. Venture Partners. The result could be the first meaningful upswing in early-stage venture investing since the dot-com era of big spending and big dreams went bust.
"I think we're at a great part of the cycle," says Shanda Bahles, general partner at Silicon Valley firm El Dorado Ventures, which announced a $200 million early-stage fund on March 3. "It's a very good point in time."
Venture capitalists say the coming cycle will benefit from the lessons of the Internet era. Investors seem to be more realistic in their expectations and the technologies they believe will prosper. Few seem excited by dot-coms. Bahles says she is interested in chip-making schemes using new materials made possible by breakthroughs in nanotechnology and in software for chip design. She's also intrigued by new software made to be rented over the Internet.
The reasons for the new early-stage focus are varied. VCs are encouraged by last year's stronger market for initial public offerings and by the rising number of acquisitions of venture-backed companies. Investments are once again beginning to show paybacks.
At the same time, seasoned entrepreneurs, who stayed on the sidelines during the downturn, are back on the field, starting new companies with interesting technology. Video-game pioneer Trip Hawkins, for instance, founded Digital Chocolate Inc., a developer of games and other software for cellular phones.
Bahles says she was drawn to Inside Track Learning Inc. of San Francisco, where El Dorado placed $4 million in July 2004, because of experienced entrepreneurs, including Chief Executive Alan Tripp.
The early signs of an upswing are already visible. Investments in emerging companies rose to 661 in 2004 from a post-dot-com bubble low-water mark in 2003, when only 601 seed and first round companies were funded, according to data from Ernst & Young and VentureOne, a unit of Dow Jones & Co. (DJ), publisher of this newswire.
That amounted to about 33% of all companies in 2004 compared with 30% in 2003. Some say the increase would be greater if not for a rise in the companies operating in stealth mode, which are not reported to the statistics firms.
At Storm, for instance, partners continue to shield a startup they funded last summer that is working on a combination software and hardware product for the business market. A second stealth company received money in the fourth quarter to develop a chip for the cellular handset market.
The idea is to protect companies and product details from copycat efforts at rival VC firms, says Floyd.
Investing statistics do lag reality, contends Paul Holland, general partner at Foundation Capital. "The people who are in the business of early-stage investing are back at work," he adds. "I think we're definitely in a big upswing of seed and early-stage investing."
The pace is going to pick up in 2005, agrees Keith Benjamin, managing director at Levensohn Venture Partners. The money is available and interesting technology is there. "I think 2004 was the start of the new venture cycle."
Nevertheless, many VCs say the increase is likely to be gradual instead rapid. Hans Schwarz, senior director of business development at Xilinx Inc. (XLNX), says he is receiving more inquires from venture capitalists interested in investing alongside his company. Xilinx looks for early stage startups designing new chips, the equipment to make chips or the complicated software used to develop them.
The question is whether they will have the patience for the long gestation period many of these companies will require, says Schwarz. |
