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Professional Investors, Hedge Funds Now Sharing the Good Deals

Venture capitalists are getting more company from angel investors and hedge funds, becoming increasingly larger players in financing new business formations. On the surface it looks like competition, but really it amounts to more investment money for businesses at all stages of growth.

“At the stage we’re investing, there are no hedge funds that are going to put money into intellectual property,” or a company that has an idea, but no actual product yet, said Kevin Kinsella, founder and managing partner of Avalon Partners, which focuses on wireless technology and life sciences firms in early stages.

“There’s so much money in hedge funds that the ‘sweet spot’ is a company with (lots of money) or (low market risk),” said Kinsella, who said his firm’s target sweet spot is typically in the single digit millions.

Kinsella said early stage companies are too volatile for hedge funds to touch.

“The last thing a hedge fund wants to do is get involved in a roach motel,” said Kinsella. “You can get in, but you can’t get out.”

Dan Wood, co-owner of Inglewood Ventures, recently partnered with a hedge fund on San Diego-based CardioNet’s mezzanine round, one of Inglewood’s portfolio companies.

In March, CardioNet , which uses Qualcomm Inc. technology to monitor outpatient cardiovascular events wirelessly , raised $110 million.

That’s well beyond the capital available to Inglewood, which usually invests between $1 million and $3 million in early financing stages.

“We were at our limits,” said Wood.

At Your Service?

Tom Clancy, formerly a partner with Enterprise Partners Venture Capital in La Jolla and now managing partner of La Jolla-based Tao Business Partners, said hedge funds, accessible to wealthier investors and largely exempt from federal regulators, don’t necessarily provide the same service as venture capitalists.

“VCs offer governance and management expertise, whereas hedge funds come from a trading perspective,” said Clancy.

Wood said that he doesn’t see hedge fund participation as competition, but as a source of funding that benefits his firm.

Kinsella’s experience is similar.

Avalon portfolio company Sytera of San Diego merged in fall 2006 with Tampa, Fla.-based Sirion, with Sirion being the surviving name.

Avalon had invested $3 million based on the potential of the company’s intellectual property; the first oral drug to treat the dry form of macular degeneration , the biggest cause of blindness.

According to Kinsella, the company later received $25 million from Greenwich, Conn., hedge fund NorthSound Capital.

“We love those guys because they’re putting a lot more money to work and the value of our investment is going up,” said Kinsella, adding that Avalon is still a large shareholder in the company.

Kinsella said that, not only hedge funds, but private equity investors of all shapes, such as university endowments, foundation and pension funds, are looking to diversify into companies with big-return potential.

“In general, there’s still a huge amount of money in the alternative investment class that is being allocated to venture capital,” said Kinsella.

Local hedge funds Meisenbach Capital Management Ltd., Hermes Advisors and Bricoleur Capital Management LLC did not return calls for comments on this story.

Richard Coons from San Diego-based hedge fund Viewpoint Investment Partners said that the fund deals only in publicly traded securities.

The Other Side

Chip Parker, president of the Southern California region of the Keiretsu Group, an angel investor forum, said: “I think there’s a myth that venture capital is the only capital. There are a lot of good, built-to-last companies that were never venture-backed.”

He added that only 12 companies on the Fortune 100 were backed by venture capital.

Parker said that angel investors are moving into an area vacated by venture investors in the past five years.

One example is Mark Cuban, owner of the Dallas Mavericks pro basketball team, who provided undisclosed seed funding in San Diego’s Goowy Media. The company is developing an online desktop , or “webtop” , operating system experience, based on Adobe Inc.’s Flash technology with such features as instant messaging and file storage.

According to an article in The New York Times, venture capital firms are still dealing with fallout from the dot-com bust and are hesitant to begin investing in technology startups.

“The capital then needs to come from somewhere,” Clancy added, which is where angel investors come in.

Avalon’s Kinsella said that in 2000, early stage investments by VCs comprised 38 percent of venture investments. Today, the number is 10 percent or 11 percent, but Parker said that VCs are moving back downstream in the face of increased activity and competition.

“There’s a lot of movement now, more so in the last six months to a year with VCs coming into earlier stage deals,” which Parker explained are between $250,000 and $1.5 million.

“A year ago, they wouldn’t look at anything less than $3 million to $5 million.

“We’re seeing a lot more companies that don’t need as much money. Just enough to get some customers and get to profitability,” said Parker, who focuses on technology and consumer electronics. He said he doesn’t include biotechnology and medical technology in his observation.

Parker said that Keiretsu, with a membership of 600 angel members, has invested in 18 companies in the last 24 months in San Diego. “The reality is we need more, fresh, earlier stage capital to fill the demand in the marketplace,” he said.

“Back in 1997, Southern California was at the bottom of the barrel for total venture cap. Now, we’re number three (behind) New England and Silicon Valley, which is still number one, but we’re continuing to move that way.”


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