VC Firms and Incubators Form, Others Fall
According to Webster’s Dictionary, the word “fever” is defined as a sickness or intense nervous excitement.
In the capital investment world, many local venture capitalists hope the term “investment fever” has the latter definition for their holdings into private and public companies.
In the past few weeks, the two major stock indexes, Dow Industrial Index and Nasdaq Market, have bounced up and down as if attached to a bungee cord. Many of the hottest Internet and biotech stocks have fallen significantly from their highs or initial public offering prices.
“Some people call what’s happened in the public markets over the past month or two as a correction,” said Ted Alexander, general partner of San Diego-based Mission Ventures, No. 3 on the San Diego Business Journal’s List of Largest Venture Capital Firms.
“For the venture industry, I think it could be better classified as something closer to a crash,” Alexander said.
He indicated many venture funds hold significant positions in several public technology companies. Within the past several weeks the stock prices of some of these companies have dropped as much as 70 percent.
Mission Ventures invests in information technology opportunities, from the Internet to networking and wireless technology. Most of the firm’s investments range from $3 million to $6 million, usually during the first institutional investment round. It has approximately $280 million under management.
– Many Firms Have
Hefty Burn Rates
He also pointed out many of these companies have “hefty burn rates of capital.” Burn rates, in financial terms, is the rate of cash expenditure for a company. For many companies, it may be crucial to maintain cash reserves if it does not show profitability.
In the local market, several recent initial public offerings in the past year have fallen significantly since its high. Companies like MP3.com, an Internet music provider, and Sequenom and Diversa Corp., which are both biotech companies, have fallen 90 percent, 89 percent and 87 percent, respectively, from their 52-week high as of April 26.
Paul Zigman, a partner of Ampersand Ventures, No. 2 on The List, said many venture capitalists were admired like “rock stars” during the booming market.
“Money can be made at all stages of investments for a venture capitalist, including early, secondary or third rounds of investments,” Zigman said.
He said many venture capitalists often made more money at earlier rounds due to reasonable valuations of start-up companies.
“The traditional venture capital model calls for involvement and money with a company if it achieves certain milestones,” Zigman said. “In the new Internet world, milestones are harder to read. And oftentimes, the milestones are partnerships or demo programs of the company, which may be less tangible than traditional milestones.”
Ampersand Ventures’ holdings include local private companies like Silicon Wave and RC Networks. It also invested into companies like Applied Micro Circuits Corp., which is now a public communications semiconductor company, and Novex, a life sciences company which was acquired by Carlsbad-based Invitrogen Corp., a public biotech company, in August 1999.
– Hundreds Of Business
Plans Reviewed Annually
Zigman reads about 700 to 800 business plans annually, but most of its investments are dealt directly from special relationships with previously known executives or other venture capitalists.
“About a third of the business plans may be interesting, but we don’t have the time to look at every company,” he said. “We need to say ‘no’ quickly, so it won’t waste our time and the entrepreneur’s time.”
Zigman said his venture fund maintains a broad portfolio and is not betting everything on the Internet.
“We’re cautious and picky about our investments,” he said.
Alexander takes a similar approach for Mission Ventures’ investments. His firm seeks companies that will show substantial returns back to the investors for a fair price.
His firm assists companies with money and advice, but not to the extent of an incubator, which provides cash, employees, equipment and offices.
“We’re more like coaches, not the players,” he said. “We’re off on the sidelines if the companies need our assistance.”
– VC Firms, Incubators
Form As Part Of Frenzy
He said more venture capitalist firms and incubators are quickly being formed to take advantage of the current public market investment frenzy.
“Many of these euphoric venture capitalists will not stick around and there’ll be a shakeout,” he said. “In the end, venture capitalists who know the industry and how to grow it will be in existence.
“Taking a company public makes a great story, but the bottom line is to do what’s best for a company.”
