Venture Capital: The state of the regional market from 3 who know

Alan Frazier, Alex Knight and Chad Waite are three of the most seasoned venture capitalists in Seattle, with more than 40 years of experience among them.

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

Together, their firms have raised more than $2 billion and backed more than 200 start-up companies.

So when the three men spoke at PricewaterhouseCoopers’ seventh annual venture capital panel this week, they had the attention of entrepreneurs, bankers and lawyers who wanted to know which way the wind is blowing in the Seattle start-up community.

Knight, who joined the Seattle office of Arch Venture Partners in 1997, painted a bleak picture. In his view, Seattle’s day in the spotlight has come and gone.

"I am a pessimist on Seattle right now," said Knight, who sits on the boards of Classmates Online, Nimble Technology and Syncronex. "Seattle got hit hard and probably harder than most areas."

He said it has become increasingly difficult to recruit management talent here, partly because of the weather but also because of the lack of economic diversity. Seattle voters, he said, have proved over and over again that they don’t want to improve the region’s deteriorating infrastructure or step up and become a big city.

"Seattle is a small town, and it likes to be a small town, and I don’t think it is going to change," said Knight. "The Northwest region has some challenges." Among those he cited were a broken transportation network and poor fiscal policies.

Paradoxically, Knight’s comments were made the same week that a study found that Seattle is the most competitive city in the country. That study, compiled by the Beacon Hill Institute at Suffolk University in Boston, pointed directly to the city’s strength in venture capital, new company creation and educated employees.

But if venture capitalists such as Knight, whose firm has offices in Albuquerque, N.M., Austin, Texas, Chicago and New York, start redirecting money to other markets, it could be bad news for Seattle. And that souring attitude could send a reeling technology community into a deeper spiral.

Venture capital investments plummeted 39 percent in the third quarter, with only one first-round deal being completed in the state.

Alan Frazier isn’t as pessimistic about Seattle’s future, saying "it is still a vibrant enough economy and fun place to live."

But the former Immunex executive, who founded Frazier & Co. in 1991 and now manages more than $750 million, admits that the start-up community — especially in health care — lags behind Northern and Southern California.

"When we start a new company in San Diego or the Bay Area, they have the experience," said Frazier. "In Seattle, we don’t have that critical mass."

Attempts must be made to broaden the economy beyond The Boeing Co. and Microsoft Corp., he said. That’s something his firm is trying to do by placing bets on early-stage biotechnology and medical-device companies such as GeneCraft and Calypso Medical Technologies.

OVP’s Chad Waite, who has nearly a quarter-century of venture capital experience, said there are "slim pickings" in health care and biotechnology in the Pacific Northwest. That led OVP to stop making investments in the sector earlier this year, a decision also motivated by lackluster returns.

But the software industry — anchored by Microsoft — is a different story, he said. There are still plenty of opportunities to find interesting software companies, although Waite’s firm has made only one new investment this year.

"I am not worried at all about deal flow in Seattle," said Waite. "I am in the business of making three to four deals a year, so we are not looking for 15 projects that we are going to invest in."

The three venture capitalists also spent a little time commenting on the venture capital industry itself, which is suffering from negative returns, limited liquidity events and other hangovers from the dot-com bust.

All three VCs said a more classic approach to venture capital is being employed.

That means building companies over the long-term and focusing on how much cash a company needs to reach break even.

Partnering with other venture firms, known as syndication, also is an important tactic in this climate because it cuts down on risk, they said.

"We’ve come back to a stunning remembrance of what it is to start a company," said Waite.

Frazier agreed, saying that with valuations falling and the investment pace slowing, "it is back to basics" again.

"It is a fun time," said Frazier. "We are all in venture capital because we want to grow new businesses, so we are being asked to roll up our sleeves."

P-I reporter John Cook can be reached at 206-448-8075 or [email protected]. For more information on Seattle-area start-ups or venture capital firms, visit http://www.seattlepi.com/venture/

http://seattlepi.nwsource.com/venture/99740_vc13.shtml