NoCo poised for return of venture capital dollars

A dramatic graph posted on the PricewaterhouseCoopers Web site – www.pwcmoneytree.com – tracks the descent of venture investment from the first quarter of 2000, when more than 2,000 deals were made, to the bottoming out in the first quarter of 2003, down to just 602.

The graph looks like a screaming double black diamond run off Winter Park’s Mary Jane, followed by a stretch of serious moguls that begin to show up at the low point of 2003. The bounce goes up in the second quarter of 2005 and then down again in the third, the last quarter for which PricewaterhouseCoopers has data.  The good news is that despite all of the bumps and dips in 2004 and 2005, the trend in venture capital investment is up.

“There is a ton of money out there,´ said Lacy Edwards, CEO of Indicative Software in Fort Collins. “Right now the funds are overflowing with an excessive amount of cash. The challenge is finding the right match.”

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Edwards, who has raised hundreds of millions of venture dollars so far in his career, was recruited specifically to guide the growth of Indicative. According to the company’s January 2005 news release, Edwards took an unknown company-Evoke Software-and its first commercial release into a “fiercely competitive market.” Under Edward’s direction, the company revenues increased to $19 million, positioning it for acquisition, precisely the trajectory in which investors are interested.

Partly because of Indicative’s potential to lead its market in the IT world, and partly because of Edwards’ ability to present the company’s story to the investment community, Indicative was the only Northern Colorado company in which Vista Ventures of Fort Collins invested in 2005.

“The venture capital community is very selective,´ said David Dwyer, general partner in Vista Ventures. “It funds maybe one out of 75 deals proposed. Colorado is a target for investment, but most of that money comes from out of state.”

Vista Ventures, which Dwyer helped found in late 2002, is a $75 million Colorado-based venture capital firm specializing in early-and growth-stage investments in software, information technology/communications, semiconductors and enabling technologies for traditional industries. The firm focuses primarily on companies in the greater Rocky Mountain and New England regions, with offices in Fort Collins, Boulder and Boston.

“The amount of the fund is adequate for now,” Dwyer said. “We have partnerships with other funds. Our co-investors in Indicative, for example, are Sutter Hill in California and Sequel Venture Partners in Boulder.”

Sutter Hill, one of 2005’s top 16 active venture investors, finances technology-based start-up and early-stage companies pioneering products or services in growth markets, especially those in information technology and health care. Sequel Venture Partners also made MoneyTree’s most active list with five deals through the third quarter of 2005.

Microcosm of V.C. world

The case of Indicative, Vista Ventures, Sutter Hill and Sequel Venture Partners is a kind of microcosm of what is happening in the world of venture capital.

First of all, the venture community has become specialized.

“The tech marketplace is so broad that you can’t know everything,” Edwards said. “So companies focus on specialties. We claim ‘enterprise software’ space, and so we look for companies that focus there as a specialty. It makes it easier to make a presentation to a company that knows what you’re talking about.”

The two other companies that have invested with Vista Ventures also focus on early growth stage IT, communications and semiconductor companies. So when Edwards made his pitch that Indicative’s products “provide context, visualization and performance monitoring of a company’s entire service value chain,” he could count on being understood.

“Our story to the investment community is that it is very complex and very expensive to develop a broadly functional software that will manage and report on a company’s IT organization,” he said. “It cost $40 million for (Hewlett-Packard Co.) to develop this software to monitor its own aging systems. Our engineering team came from Agilent and holds the license. We are the only second-generation product on the market.”

If the story of Indicative is the microcosm of the relationship between entrepreneurship and venture capital, what does the bigger picture in Colorado look like?

“In the heyday of venture capital investment, Colorado ranked about fifth as a target for investment,” Dwyer said. “Now we’re about tenth.”

Colorado has what investors want

According to the MoneyTree survey, Colorado is running in 12th place. But unlike other regions that increased-sometimes dramatically-in the second quarter only to fall back in the third, Colorado showed steady growth. It was not the number of deals that increased, it was the dollars invested: from $114.1 million in the first quarter, to $147.3 million in the second, to $168.1 million in the third.

What may further improve Colorado’s standing is that the big gainer nationally in 2005 was the life sciences sector (biotechnology and medical devices industries together): precisely the sector that has attracted the most funding in Colorado (at 43.72 percent of the total according to the MoneyTree survey). Software, the national leader, came in second in Colorado. Nanotechnology gets a mention as a breakthrough technology – and the lab at Colorado State University may just supply the hammer. In sum, Colorado has what investors are looking for.

Not that it will be easy money.

“The coming year will be characterized by less risk, less hype, and more interactions between investment sectors,´ said Mark Heesen, president of the National Venture Capital Association.

Edwards pointed out that even though venture capital firms had a good fund-raising year in 2005, the investment community has become much more disciplined as it emerges from five of the worst years ever.

“This discipline may prove to be a challenge to the next round of funding,” he said.

And the competition for funding is likely to reach beyond political boundaries. A December 2005 NVCA news release quotes Deepak Kamra, general partner of Canaan Partners (one of the top 10 most active funds): “The U.S. venture industry will accelerate its advance toward worldwide penetration for it to get better returns. Herzliya Pituach (Israel), Bangalore and Shanghai beckon with lots of risk but higher returns.”

Meanwhile, for a company like Indicative, global is good. There is just no telling how many health services, banks, governments and media outlets would like to squeeze more life out of their older equipment and still stay competitive.