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VC’s Good Old Days Are Gone

BY JON HINDMAN

When the American Film Institute released its 100 greatest movie quotes of all time this summer, memorable lines such as “Here’s looking at you, kid” from “Casablanca” and “Toto, I’ve got a feeling we’re not in Kansas anymore” from “The Wizard of Oz” made it into the top five.

At No. 25 was a line that that many entrepreneurs, startups and even late-stage companies hope to yell if they’re able to secure venture capital funding: “Show me the money!” from the 1996 hit film “Jerry Maguire.”

Companies getting into the VC game right now won’t have as easy a time raising money as the good old days of the late ’90s and early 2000 provided.

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“From ’95 to 2000 was the perfect storm of technology spending,” said Steve Hamerslag, managing director of San Diego-based Titan Investment Partners LLC, which was founded in 1999 and now has four full-time employees. “I’d never seen anything like it and I’m pretty confident I never will again.”

The current environment is nothing to scoff at, however. After the bubble burst, from late 2000 until 2002, investors became ultraconservative and funding opportunities tightened up immensely, but now the environment is really loosening up, even if it has changed slightly, Hamerslag says.

Since the perfect storm that Hamerslag describes, many local VC firms have broadened their horizons and even changed their funding philosophies. Titan certainly is no exception. Up until a few years ago, the fund was concentrated more on backing early-stage companies, but now funding expansion capital situations for later-stage software and software-enabled companies with revenue in the $2 million to $25 million range is the norm, according to Hamerslag.

That’s not to say that every VC firm in San Diego has opted to leave the early-stage-funding well dry. There’s money available for all stages of fund raising.

A prime example of a company holding on to its roots is Avalon Ventures in La Jolla. In early March, the firm, which has remained focused on startup and early-stage investing since 1983, closed Avalon Ventures VII, a $75 million fund. Notably, this latest fund, reserved for the biotechnology and wireless technology realms, is the largest in Avalon’s history.

Kevin J. Kinsella, founder and managing member of Avalon, finds startup and early-stage investing exciting and challenging. Plus, getting in on the ground floor lets Kinsella and his team sculpt a successful company.

“We like to invest at such an early stage so that as the company creates its capital structure, who’s involved with the company, how much money is being raised, and what markets they’re attempting to enter, all these critical things are being analyzed and accomplished with our advice and input,” said Kinsella.

Because of this, he doesn’t envy his VC brethren who concentrate on later-stage investing.

“It’s a lot more difficult for a later-stage investor to go back and try to fix what was done improperly at the beginning,” he added. “We hate that. It’s an exhaustive waste of time. We like to get it right the first time and you have that opportunity starting from a blank sheet of paper.”

Most of the companies Avalon backs, in fact, don’t even have a business plan scripted. Investing in wireless and biotech ideas that are often at the preplanning stages seems like a risky proposition, but Kinsella divulges that Avalon’s niche has been lucrative.

“We’ve been doing (early-stage investing) since the fund’s inception and we’ve been very good at continuing with that same DNA to find and exploit great opportunities at early stages,” he said. “And our track record is that we’ve had very few failures.”

Avalon, which has five employees and was founded in 1983, says it has had only four failures in 22 years of business.

Obviously, VCs try to eliminate failures from their portfolios as much as possible. Therefore, to increase their chances of success, certain steps are followed with extreme precision.

In Titan’s case, it looks for companies that have a foothold in a large and fast-growing market, a strong management team, a sustainable competitive advantage, and multiple exit opportunities. As for the latter, initial public offerings are not as attractive as they were a decade or even a half-decade ago, so most times Titan concentrates on the likelihood of merger and acquisition exit strategies, because, Hamerslag said, “The M & A; environment is active, supportive and viable.”

Kinsella agrees. Even though his firm looks for some different standards when considering pouring cash into a relatively infantile venture (Avalon is concerned with the quality of the technology or technological idea, potential size of the market, and the track record and industry savvy of the founding team members), he admits that M & A; exits are increasingly growing in popularity.

“We love M & A;,” he said. “As long as you’ve created some good value and you’ve got something that a company might want to acquire, we think it’s a terrific exit. They pay well and your stock isn’t locked up.”

With IPOs, he adds, company insiders can’t sell their stock for six months, sometimes even a year, which often makes the M & A; market more attractive. Certainly, IPOs aren’t out of the question, though.

Hamerslag offers another strong tip to increase the chances of securing capital: “People should leverage their own personal networks , sometimes through their lawyer or accountant or other professional relationships , to gain entrance into one of our funds because, for the most part, very few deals get done that are from a business plan that just gets sent in.

“It really is a relationship business and we rely heavily on the credibility of those who bring us opportunities,” he continued. “It acts as a filter because the one thing we don’t have a lot of in this industry is time.”

So, in the long run, if firms don’t have their ducks in a row when searching for capital, they may be repeating another quote from AFI’s top 100 list , Marlon Brando’s famous words from “On the Waterfront”: “I coulda been a contender.”


Jon Hindman is a freelance writer from Poway.

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