For venture firms, there’s no place like home

Washington state venture investors have decided home is where the heart is, or at least it’s a lot closer than California.

At one time, venture capitalists in the state invested more heavily in California companies than home-grown ones.

No longer.

By Tricia Duryee
Seattle Times Eastside business reporter

In the past year and a half, Washington state companies have regained the top position in where local venture investors are putting their money.

"I think you are seeing that nationwide. People are investing closer to home. The California gold rush is over and the other 49ers went back home," said Jesse Reyes, vice president of Thomson Venture Economics, an industry research organization. "It’s simple back-to-business basics. It’s a pain … to travel."

Figures being released today show how the geographic source of money for many Washington companies has continued to change since overall VC investing started declining in early 2000. Instead of relying so heavily on out-of-state investors for their working capital, they are now getting about 25 percent from local VCs, a rise from 16 percent three years ago, according to the MoneyTree Survey compiled by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Through the years, California and Washington have battled it out for the top spot in Washington investors’ hearts. In 2000, when venture capital investing hit its peak, California ranked as the most popular place for Washington state VCs to invest. Thirty-two percent of the $1 billion that state VCs collectively invested that year headed to California, compared with the 25 percent invested in Washington companies.

By 2002, those roles reversed: Washington VCs invested 46 percent or $120.2 million — more than half of all the millions they invested — to state companies. California enterprises ranked second, receiving 37 percent or $37.8 million. The percentage for the first six months of this year is 36 percent for Washington companies and 26 percent for California ones.

Washington state investors include Alexander Hutton Venture Partners, Fluke Venture Partners, Ignition, Madrona Venture Group, Maveron and others. Large institutions such as Washington Mutual were not included, and neither was Polaris Venture Partners, which has headquarters in Boston and Seattle. But Microsoft’s venture arm and Paul Allen’s Vulcan were included, according to Thomson Venture Economics.

Numerous theories exist about why investing patterns have changed in Washington.

Andy Dale, managing partner at Seattle-based Buerk Craig Victor, reasoned that some investment companies might not want to stretch their resources too thin, especially if a fund was close to fully invested.

"You can only do so much," he said. By staying at home "you might have more of an impact."

However, if it is a compelling enough deal, that argument wouldn’t stand, said Chad Waite, general partner at OVP Venture Capital in Kirkland. "If you see a really good deal in California, it would be hard to justify not doing it because of the added expense to monitor it," he said.

Waite said OVP, which has historically concentrated on the Northwest, has made only one investment in Washington, one in California and two in Oregon in its newest fund.

Enrique Godreau, managing director of Voyager Capital, which has offices in Seattle and Menlo Park, Calif., said Seattle is picking up because the technology it mostly supports is coming into one of the strongest parts of its life cycle.

Typically, there must be an advance in hardware technology before software can be developed for it. Because Seattle’s strengths lie in software, it must wait two to three years while hardware is developed, he said. Wi-Fi, a wireless Internet technology, has roots going back to 1999, Godreau said. Three years later, "you see a pop" in the number of Washington state Wi-Fi software developers receiving investment money.

John Taylor, the vice president of research for the National Venture Capital Association, cautioned you can’t read too much into the numbers. There is no reason for the change other than that good deals are being found here.

Tom Simpson, managing partner at Northwest Venture Associates in Spokane, noted that there are more local investors today.

"Remember, back in 1995 and 1996 the only local state VC funds that were actively investing were Olympic (OVP), Frazier, Roanoke and Fluke," he said. "Since then we have seen several new funds." It is those funds that have been able to fuel new growth.

Tricia Duryee: 206-464-3283

Copyright © 2003 The Seattle Times Company

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