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LEAD STORY — Venture Capitalists Eager To Close Deals In Competitive Environment

cross San Diego County, dozens of start-up Internet, telecommunications, technology and biotechnology companies are getting vital infusions of cash to help drive their businesses forward.

Venture capital investments in San Diego companies broke the single-quarter mark of $200 million for the first time during the third quarter of 1999, according to PriceWaterhouseCoopers Technology Industry Group.

A record $214 million was invested in 31 companies through private stock purchases. That’s an 8 percent increase over the previous quarter, which also set a record with $199 million in placements, said Jim Ingraham, a partner with the local office of PriceWaterhouseCoopers.

It’s 206 percent more than was invested during the third quarter of 1998, Ingraham added.

Venture capital placements for the first nine months of 1999 climbed to $550 million, compared to $299 million for the same period in 1998, he said.

“The good news is that venture capital funds are available,” Ingraham said. “It is a more competitive investment environment, so VCs seem to be anxious to find and close good deals.”

To Alex DeNoble, professor of management and entrepreneurship at the San Diego State University School of Business, the growth in venture capital funding is a direct outgrowth of the soaring stock market.

Those large investors who become equity participants in small, start-up companies that are privately held see the opportunity for large profits when a company’s stock is finally offered to the public, he said.

“The investment becomes liquid when the stock becomes publicly traded,” DeNoble said.

DeNoble recently aided an Irvine-based company, Dental Exchange Inc., to obtain funding by helping draft a business plan that was presented to investors.

The company hosts the Web sites of dentists and also acts as a conduit between dental supply and equipment makers and the dental professional community, DeNoble said.

His experience with the company has led him to believe in the importance of a polished business plan to show potential investors.

“The company’s management also has to be able to tell their story and respond quickly to questions like ‘What is your company?'” DeNoble said. “The management needs to clearly articulate their concept and show that they are positioned in a huge and growing market and that they have the management talent to execute the business plan. They also need to show how they would deploy any invested funds.”

– Venture Funding

Increases Dramatically

DeNoble has noticed the amount of venture funding for companies has risen dramatically in the past five years. In 1995, a typical venture capital investment was between $100,000 and $250,000. Now, a typical initial funding can range between $1 million and $3 million, he said.

“Typically, the early round of funding focuses on the proof of the concept with a lot of money going to technical product development,” DeNoble said. “But when the subsequent funding rounds come in, that money is used to ramp up the marketing and sales to get the company going.”

That is the way Ensemble Communications Inc. of San Diego has used its venture funds, said Carlton O’Neal, vice president of marketing for the high-speed, broadband wireless communications company.

So far the company has raised a total of $25 million from institutional investors such as pension funds and from national companies such as Intel Corp., Digital Microwave Inc., and Samsung Corp. of Korea.

“We used the first amount of $17 million in 1998 to build the product, and the rest of the money is being used to get the company ready for market,” he said.

“It’s kind of a horse race now,” O’Neal said. “We have the best technology in the industry and we have a market position that is sweet. It’s just about getting the product to market right now and getting it deployed.”

– Start-Ups Reminded

To Follow The Rules

Martin Nichols, a partner in the local office of law firm Brobeck, Phleger & Harrison, said there are some ground rules to keep in mind when seeking venture capital. He recently helped Menlo Park-based Broadband Office Inc. raise $50 million. Those funds came equally from Sun Microsystems Inc. and Microsoft Corp.

“The first thing to remember is that venture capitalists will rarely invest in a deal that hasn’t been referred to them by a trusted source,” Nichols said.

“Secondly, even through you think your idea is great, assume that there are five to 10 other companies out there that are doing something similar and you have to have something that separates you from the competition.”

Nichols is involved in raising funds for Internet, telecommunications and computer networking start-ups. He’s finding that in those fields, a good management team is as important as a good idea.

“Most venture capitalists look more at the management team than the concept,” Nichols said.

– Programs Provide

Tips For Presentations

For those polishing their road show before meeting potential investors, UCSD Connect offers a variety of programs to help, said Abi Barrow, program director. The organization last month teamed up with the San Diego Internet Roundtable to produce a daylong program and reception to highlight the Internet industry in San Diego.

At the meeting, seven early-stage companies presented business plans to an audience that included a panel of investors and experienced Internet business people, Barrow said.

“The entrepreneurs gave them comments on their presentations and also on the likelihood of their raising money,” she said.

“We also had a separate forum in February where 312 companies had six minutes each to present their business plans to an audience of more than 80 venture capitalists, venture bankers and large private investors.”

She anticipates several business deals coming out of both of the conferences in the upcoming months.

Barrow’s organization also provides the resources start-up companies need to find money, management and the appropriate market for their products, she added.

“Most companies come to us and sign up for the Springboard Program, which is when our staff works with the start-ups to develop a 10- to 15-minute presentation,” Barrow said. “When we feel that they are ready, we put together a breakfast and they put on their presentation.”

– Audience Shares

Their Opinions

Barrow said the audience of investors, business advisers and professional service providers is quite candid in telling the budding business people whether or not they think the business idea will fly.

“For the emerging company it gives them exposure to senior-level management within the San Diego business community,” Barrow said. “So they often get a lot of leads to potential funding sources, partners or even potential members of the board of directors of their company.”

Sometimes venture capitalists will seek a seat on a company’s board of directors when making an investment, she said.

An important part of any presentation is a printed business plan, Barrow said.

Christy Pasela, owner of Creative Fusion, a Downtown graphics and public relations firm, has put together many business plans for customers in recent months.

“We put together their material in a visually interesting form,” Pasela said. “We do certain elements of an investment package that need to be visually interesting.”

– Business Plan Packages

Can Costs Thousands

She said the cost of putting the business plan package together can start at about $2,000 and go higher from there, depending on how elaborate is the desired package.

Aaron Block, former CEO of Vfinance Holdings of Lake Forest, created a Web site and database of venture capital firms in 1994. Now the site (www.vfinance.com) is getting close to 4 million hits a month, he said.

“Typically, the people who use our Web site are small- to medium-size companies. Anybody with an idea can present it on the Web site,” Block said. “They also can post an executive summary of their business when they are seeking venture funds.”

It isn’t just venture capitalists who will put their money behind promising start-up companies, according to Chris Woolley, a senior vice president and regional manager at a San Diego branch of Imperial Bank.

“The most typical scenario is there is a major venture capital infusion by an institutional investor,” Woolley said.

“Then we will follow up with equipment loans, leases and lines of credit to help facilitate the business in exchange for an equity position in the company along with the origination fees and interest.

“We get a share of the equity at the same price the venture capitalists pay and then usually sell when the company goes public,” Woolley said.

– Investors Focus On

High-Tech And Biotech

Dr. Drew Senyei, managing partner of Enterprise Partners Venture Capital in San Diego, said the focus among venture capitalists now is on Internet, E-commerce, and telecommunications, as well as health care and biotech companies.

“Usually, we need to see an initial business plan and need to understand who the management and the CEO in particular will be,” Senyei said.

While his firm prefers to back companies with experienced management, it still will back first-time management teams, such as those from dot-com companies who may all be in their 20s.

“We manage $750 million for institutional investors,” Senyei said. “We receive quite a few plans a year with friends and previous CEOs of this company referring them to us as well as accountants and lawyers.

“We believe in backing people, because markets and technology change,” Senyei said.

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