Venture capital stabilizes in state; startups popular

Venture-capital investing in the U.S. fell slightly during the third quarter, while it picked up in Washington state compared with the previous three-month period.

By Tricia Duryee
Seattle Times Eastside business reporter

Overall, industry observers say the amount of activity — comparable to 1997 and 1998 — is at a comfortable level, with expectations of small, incremental increases in future quarters.

"We are settling back into a realistic balance between entrepreneurial enthusiasm and venture-capital risk," said Tracy Lefteroff, global managing partner of the venture-capital practice at PricewaterhouseCoopers, which released its quarterly MoneyTree Survey yesterday in conjunction with Thomson Venture Economics and the National Venture Capital Association.

During the quarter ending Sept. 30, venture capitalists invested $4.2 billion in 667 companies in the United States, down from the second quarter and down marginally from the year-ago $4.4 billion.

In Washington, 17 companies received $93.5 million, up from $67.6 million invested in the second quarter and down 32 percent from $137.1 million invested in the third quarter of 2002.

These numbers differ from a survey also released yesterday by Ernst & Young and VentureOne. That survey said investing in Washington was down significantly, falling to $64.5 million in the third quarter from $150.5 million raised a year ago.

The two surveys compile and release information differently. VentureOne doesn’t report an investment until a company officially completes a round of funding. The MoneyTree Survey releases information as the money comes in to the company.

Either way, it appears venture investing is settling in at a quarterly level of $4 billion nationwide and about $100 million in Washington.

Michael Kendall, a Boston attorney who handles VC transactions as part of Goodwin Procter’s Technology and Emerging Companies Group, said his phone rang more often during the quarter, making it one of his busiest summers in recent memory.

"You aren’t going to see a major flood of dollars," he said. "But you will see a steady investment flow into the high quality opportunities that are out there."

The amount of money going into life sciences nationwide caught attention. For the first time in seven years, biotechnology, at $873 million in investments, topped the list of industry segments, displacing software.

That didn’t hold true in Washington, where telecommunications and software ruled with four deals each. Software received $25 million and telecom recorded $23.2 million. Three companies in the biotech and medical devices sectors raised money — for a total of $22.1 million.

Washington also bucked a national trend by directing a majority of money during the quarter to startup and early-stage companies. (Seed and early-stage companies are typically still in development or starting to have revenue and a commercial product.)

More than half of the money raised during the quarter, or $50.8 million, went to such companies in the state.

By contrast, early-stage investing stayed flat in the country as a whole, accounting for only 20 percent of the dollars invested, or $821 million.

Early-stage investing in Washington included three large deals consisting of Redmond-based Archus Orthopedics, Spokane-based Avista Labs and Bellevue-based TeleSym. The three respectively raised $18 million, $12.5 million and $15 million.

Tom Simpson, managing partner at Spokane-based Northwest Venture Associates, cautioned it’s hard to draw conclusions based on one quarter.

He said there are two schools of thought on investing in early or later stages.

Some investors prefer early, while others perceive there is less risk in later stages because companies might be closer to a return on investment through a sale or a public offering. "I think it’s hard to tell which trend is most pervasive," Simpson said.

Simpson’s company, which made four of its five investments in Washington, said he does not abide by either rule since the pool of candidates for deals would be too small in the Northwest if he were to choose just one.

David Billstrom, managing partner at FBR CoMotion Venture Capital in Seattle, said he had thought later stage investing would be up.

During the past few quarters, Billstrom continued to invest more in companies already in his portfolio, believing they deserve more funding and are less likely to get it elsewhere.

Perhaps early-stage investing is growing because the quality of entrepreneurs and their technology is improving, he said. And it’s possible later-stage companies are raising less money now because they are either profitable or waiting to go public or be sold.

That would mean slower growth in the interim but would avoid diluting the current shareholders’ equity, Billstrom said.

If the trend does continue, he said, it would be a good sign investors are going back to the roots of venture capital by making risky investments again.

Tricia Duryee: 206-464-3283 or [email protected]

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