Sacramento-area tech innovators say funds aren't drying up

This story is taken from Sacbee / Business.

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Sacramento-area tech innovators say funds aren't drying up
By Mark Melnicoe - mmelnicoe@sacbee.com
Published 12:00 am PDT Friday, April 18, 2008

One area that has held up well amid the economic slowdown is emerging technology, but there could be a few clouds on the horizon, based on a report released Thursday.

The Silicon Valley Venture Capitalist Confidence Index declined sharply for the second straight quarter, bringing it to a reading of 3.22 on a 5-point scale, the lowest in the four-year history of the index.

Mark Cannice, a business professor at the University of San Francisco and author of the index, said it reflected a worsening situation for emerging private companies being purchased or going public.

"The financial market volatility has made exits or the sale of venture-backed firms more difficult early in 2008," he said in a telephone interview.

Nevertheless, local venture capitalists pronounced themselves confident that funding is not drying up in the Sacramento region.

Scott Lenet, a founder and managing director at DFJ Frontier, said economic cycles aren't really what matter when it comes to VC investing.

"It's all about finding great entrepreneurs with a great business idea, no matter what state the economy is in," he said.

"Even the guys who are worried right now are going to keep investing," Lenet said. "Sometimes when people are a little bit nervous, that's when the best investments get made."

Cannice's report noted that only five venture-backed companies nationwide were able to move to initial public offerings during the first quarter. That's the lowest number in nearly five years. And only 56 venture companies were acquired by bigger firms in the first quarter – a 10-year low, according to the National Venture Capital Association.

Those meager results are a result of volatility in the public markets, analysts agree. And they have venture capitalists rethinking their investments in these small, startup companies – mainly information technology and life science firms.

"It is in a sense a further spread of the credit crisis," Cannice said. "The credit crisis essentially slowed down the public half of the capital markets. The venture capitalists … weren't affected immediately. It is now seeping into their business model."

Sacramento's KeyEye Communications, once a high-flier among local VC-backed firms, folded last month when it ran out of venture funding. CEO Mike McConnell complained that "VCs' lack of confidence" left his firm high and dry.

But Cameron Lewis is seeking venture funding now for VuStik, his West Sacramento-based company. It produces a device that uses near-infrared light to help medical practitioners better identify veins before putting a needle in them.

Lewis said he's not encountering any unusual resistance in seeking his Round A funding.

"If you've got a quality product, if you've developed the attributes of that product, that's what's important," he said.

Longtime local venture capitalist Roger Akers cited what he saw as a key difference between Silicon Valley and Sacramento.

"Investors in the Sacramento region are more opportunistic and less strategic in their approach to what they invest in, so as a result they look for good deals and good management teams that are going to flourish in our economy and take a longer-term view," he said.

Silicon Valley supplies a large share of the nation's VC funding – as much as 40 percent, analysts say.

While the confidence level there has dropped, the funds continue to raise money. The NVCA reported Monday that $6.3 billion was raised by venture firms nationwide in the first quarter, the same as the fourth quarter of 2007.

That money will get invested in entrepreneurial companies at some point, Cannice noted. But the timing and the terms may well change, he said.

He also saw a silver lining for those investing seed money to get companies off the ground.

"Early-stage investors are somewhat more optimistic," he said, "because they're looking three, four or five years down the road. In that way, it's not a bad time to invest in early-stage (ventures) because they don't have to worry about an exit for a couple, three years. And also, valuations have come down because they're getting more of the company."