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Laid-back Image Scares Venture Capital Away from Oregon

They hoped to create the next Amazons, Microsofts and Ciscos.

So they poured more than $2.5 billion into 101 Oregon and Southwest Washington startups during the technology boom.

Jeffrey Kosseff
The Oregonian

They gave $60 million to a bunch of guys who wanted to build a camera shop’s Web site. They gave $24 million to an outfit that wanted to refer consumers to handymen. They gave $99 million to a telecommunications equipment-maker that had no — and barely found any — customers.

They are the investors. And they are — or were — all hoping to find Oregon’s next Big Thing.

But now that the cyberdust has settled, none of their babies has turned out to be It. Many companies that received huge rounds of venture capital are defunct, and a field of mostly small players remains, surviving on low expectations and tight budgets.

Although many have blamed the struggling economy for the arid state of the Silicon Forest, some observers have another thought: The money is staying away because of outsiders’ perception that Oregon is too laid back to house aggressive startups.

And until a home-grown startup makes it big, the lack of success will reinforce that perception, creating a self-fulfilling prophecy that will scare investors from the state during the next boom.

To gauge the fallout of the dot-com boom, The Oregonian examined the 101 Oregon and Southwest Washington startups that publicly announced receiving venture-capital investments from January 1999 through December 2001 — the boom’s peak funding period.

Thirty-four are out of business or have been acquired; the rest continue to operate independently. Of the $2.54 billion in venture capital tracked by The Oregonian, $685.82 million — or 27 percent — was given to companies that no longer exist or were acquired.

That seemingly high survival rate is deceiving. Many of the 67 survivors have shown little return on investment and are operating on shoestring budgets, praying for more capital or a quick economic recovery. Neither scenario is expected soon.

No giant redwoods in the Forest Silicon Valley has eBay and Google. But Oregon — unlike other tech-heavy regions — does not have one company to hold up as a large-scale success story from the most recent boom.

Sure, Oregon has healthy, growing tech companies such as Tripwire, New Edge Networks and Integra Telecom, but none is a household name.

Oregon’s largest gambles included e-commerce company 800.com, which received $136 million, and telecommunications-equipment-maker Oresis, which received $99 million. Both closed shop last year.

"I don’t know of anybody here who went for the big win and made it," said Gerry Langeler, a partner at OVP Venture Partners, a venture capital firm with offices in Portland and Seattle.

Langeler, whose firm invested in 800.com and other local startups, said the risky e-commerce and telecommunications sectors forced companies to seek large sums of cash.

"Those are all plays where you had to make a multi-tens-of-millions-of-dollars bet to win," he said.

But the entrepreneurs often failed to prudently plan and spend their treasure chests of venture capital, said Les Fahey, a Portland consultant who advises and sits on the boards of area startups.

"I’ve seen a lot of companies make more progress with smaller amounts of money than when they get a lot of money," Fahey said. "They don’t plan their business as carefully. They have a tendency to go through money very quickly."

But while less investment means less risk, Langeler said, it also usually means less return.

"The good news is they kept their expense rate down," he said. "The bad news is they may never become anything significant."

The vicious cycle, of course, requires more investment to play in the big leagues. And that’s now hard to find in Oregon. In 2002, Oregon startups received $159 million in investments, compared with $543 million in 1999, according to a MoneyTree survey conducted by PricewaterhouseCoopers. And much of that 2002 money is providing life support to existing companies.

"A number of the investors are primarily focused on supporting the companies they’ve already invested in," Fahey said. "The financial markets are fairly stressed now."

Business or bicycling? Granted, the technology-sector economy is contracting almost everywhere. But the decline has been more precipitous in Oregon.

According to the MoneyTree survey, U.S. venture capital investments fell from $55 billion in 1999 to $21 billion in 2002. But that 62 percent decline — which includes the masses of failed dot-com losses in Silicon Valley — is smaller than the 71 percent drop in Oregon.

Silicon Valley’s perception of Oregon is partially responsible for the state’s decline in investments, experts say. California investors see Oregonians as laid-back fun-seekers who would rather take the family camping than spend a night writing a business plan.

"The perception exists in the venture community that entrepreneurs who have the gumption to build a business in Silicon Valley, the competitive mecca, probably have a more aggressive culture than people in Oregon," said Derek Ridgley, senior vice president of Silicon Valley Bank’s Beaverton office and chairman emeritus of the Oregon Entrepreneurs Forum. "There may be some truth to that perception. There may not be."

Robert Ellis learned about that perception the hard way — when he struggled to raise another round of funding for his Tigard company, IronSpire, which makes construction-industry software.

"I have had venture capitalists who said, ‘We like the business plan, we like the team, we like the market — but we’re not coming to Oregon,’ " said Ellis, a New York native. "Oregon is seen lacking management, lacking work ethic, lacking aggressiveness, lacking a major educational infrastructure. Most companies homebred here end up giving up too early. They sell out or are acquired or have no desire to reach beyond."

That perception is reinforced by Oregon’s small number of initial public offerings of stock, Ridgley said.

"That difference matters a lot to the perception of how aggressive a given market is," Ridgley said. "In Oregon, we have a very anemic market for IPOs."

The one modest exception Ridgley and others point to is Pixelworks, a Tualatin chip-maker that went public in May 2000. But even that, he said, isn’t a "home-run success" that will catch the eyes of big-time venture capitalists.

"The company has done well, but the market cap today is still on the order of a couple of hundred million dollars," Ridgley said. "That’s not the kind of valuation that will get you excited if you’re managing a billion-dollar pool of venture money."

And Oregon has historically failed to create major tech companies. Since the "modern era" of venture capital began in the early 1980s, publicly traded companies such as Mentor Graphics, InFocus and Planar Systems emerged, but none has broken the crucial $1 billion annual-revenue mark, said Will Glasgow, strategic director at the Portland office of Madrona Venture Group, a $250 million Seattle venture capital fund.

"In the same period in Seattle, I can think of four or five companies off the top of my head that have become substantially larger enterprises," Glasgow said.

Learning to adjust For at least the next few years, Ridgley said, companies should expect the venture capital industry to continue contracting.

But he also said companies are learning to adjust.

"We are not done with the process of adapting to a reality today that requires a lot less venture money to start," Ridgley said.

To survive, some startup executives are working for free and making other sacrifices, said Rick Nagle, a Lake Oswego angel investor — an individual who puts money into a startup.

"These companies are street-smart," Nagle said. "There’s a lot more common sense about what they need to survive. They’ve been running lean and mean for the last couple of years."

Fahey, the adviser to Portland-area startups, said venture-capital funds are still available — but the bar is higher than ever. Companies must prove their ability to generate both revenues and profits, he said.

"Now you need to have a really good idea, it has to be a compelling product that customers want badly, and you really need to put together a strong management team in order to attract attention," Fahey said.

Business leaders say that to increase venture-capital investment, Oregon must follow the broader goal of being perceived as more business-friendly. In the venture-capital world, this means loosening securities regulations to be in line with competitive states such as Delaware and changing the tax structure, according to a report released in December by the Oregon Council on Knowledge and Economic Development.

In addition to state policy changes, business groups should work to market Oregon as business-friendly — a strategy that has been successful in Washington, D.C., Utah and California, said Dee Mirando-Gould, senior manager in the technology practice at the Portland office of PricewaterhouseCoopers.

" I don’t think you all of a sudden become a more business-friendly area and people just flock there," she said. "It takes the incentives and it takes a lot of effort from the community to make the area more well-known. It takes time."

Until then, Nagle said, angel investors are a good source of new money for companies — provided they can demonstrate their ability to run on a tight budget.

When asked for an example of an Oregon success story, Nagle pointed to an unlikely example — WeSync.com, a software company that no longer exists. It was acquired by Palm in 2000 and later dismantled.

But unlike other companies acquired for bargain-basement prices, WeSync.com received $45 million from Palm — bringing huge returns to its original investors, who paid a total of $7 million.

"I think it’s a success, because everybody got a good return," said founder and former Chief Executive Pete Grillo, whose company made software for handheld devices and employed 27 people. "But it certainly was a sad end to what was an exciting team. We felt we were doing something."

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