Venture capital outlook: Steady for ’07

Financing. It’s the No.1 hurdle for many startup companies, especially those in industries where research and development come before revenues and dividends.

While the venture capital industry is continuing to make year-over-year investment increases, companies seeking financing shouldn’t be expecting any major upticks in the coming year.

So says Vista Ventures partner Dave Dwyer. Vista is a Colorado-based VC firm with offices in Boulder and Fort Collins.

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“I don’t see this year being any different than last year,” he told the Business Report.

In general, Dwyer said he thinks that several Colorado-based funds will spend this year focusing on raising money rather than investing it. He also believes that 2007 will see venture firms achieving exits from some investments.

Venture financing has been steadily increasing over the past few years around the nation and in Colorado. Data from PriceWaterhouseCoopers’ Money Tree Report show that Colorado hit the post-bust venture capital bottom in 2004 with companies in the state receiving only $438 million in venture financing. However, 2005 was a strong year with $570 million in investments.

The data for all of 2006 are not yet available. Through the third quarter, Colorado companies had landed $444 million in venture capital.

Dwyer said that interest in companies offering consumer products on the Web seem to be picking up. The recent surge in online products such as YouTube and MySpace have put Web companies back on the radar for many VC firms.

“There’s been more interest in biotechnology in Colorado in the last few years,” Dwyer said. “I think you’re going to see a little more action in that area.”

In 2006, Colorado biotechnology companies received $37 million in funding through the third quarter in nine separate deals, according to the Money Tree report. It would have to be a fairly successful fourth quarter for the year to end as well as 2005 with $98 million in funding. However, that amount was reached in only four separate deals.

“Our firm has made a recent investment (in a biotech), and we are looking at another one,” Dwyer said.

Software development still attractive

Of course, the high-margin industry of software development continues to be an attractive space for venture funding. Fort Collins-based Indicative Software received a $6 million round of series B financing in April. For the three-year-old company, venture financing wasn’t a new, well, venture.

“It took a little over 90 days from start to finish,´ said Indicative CEO Lacy Edwards of the series B round.

Indicative was lucky to land its first round of funding shortly after becoming a company because it started with a license for technology developed by Agilent Technologies. Having a market-ready product, or close to it, from a large, publicly held company can be quite attractive to potential investors.

Half of Indicative’s second round came from its original investors, with the other half coming from a new firm – Vista Ventures. Edwards said that the round will be used to expand the sales and marketing efforts of Indicative.

Edwards is no stranger to capital-raising efforts.

“I’ve done more rounds of financing than I can recall,” he said.

His tip to companies looking for early stage financing is to get as far as you can without it.

“You’ve got to prove you have a real business,” he said. “The best thing to do is bootstrap it and get a few customers first.”

Help from state

Overall, the first time is the hardest, according to Edwards. But it might be getting a little bit easier in Colorado.

In 2004, the state legislature created the Venture Capital Authority with the goal of creating and managing funds for startup and early-stage businesses. The VCA assigned the duty of managing the initial investment fund of $25 million – known as Colorado Fund 1 – to High Country Venture LLC.

High Country has been accepting business plans and choosing Colorado companies to invest in for the past year and a half. In all, High Country has received nearly 250 business plans, according to partner Mark Lupa.

“It takes a lot of work to filter through all of those,” he said.

Through the end of 2006, the Colorado Fund had invested in five companies. Investments ranged from $100,000 to $200,000 in most cases. The largest investment of $2.1 million went to a Boulder-based digital security firm called EnVysion LLC. Lupa said that the largest investment allowed by the VCA is $3.3 million.

Lupa said that the fund is likely to close on two additional investments by the end of January. High Country Venture is always accepting new business plans. Interested parties can learn more about the funds and the requirements at www.coloradofund1.com.

Lupa said that the best plans are usually very succinct – about two pages of executive summary and 20 pages dedicated to the actual business plan.

“We like to see a very reasonable and well-thought-out financial plan,” he said, adding that a month-by-month description of expected expenses and incomes is best.

Despite being a state-run fund, the VCA expects returns on the investment made like any venture firm. Returns made will be allocated again by the VCA, perhaps to begin another fund.

To date, no Northern Colorado companies have received funding from Colorado Fund 1; however, Lupa said there have been applications from the area.

“We are looking at companies in Larimer County,” he said. “I’m actually looking at two companies up there right now.”