Venture funding for tech hard to get

Venture-capital pockets may open up in 2003 after previous tight year

Jonas Pologe’s Boulder-based company has been seeking funding for more than a year.

Pologe is one of three co-founders and chief technology officer of Kestrel Labs Inc., a startup medical technology company that’s banking its future on a noninvasive medical monitor still in the prototype-development stage.

“So far we have not received any funding, but we have had a great deal of interest,” Pologe said. “We tried several different sources of funding and found out that they didn’t make sense for the stage we were in.”

Inexperience and optimism led Pologe and his partners to first seek funding from venture-capital firms.

“Virtually every VC we spoke to started the due-diligence process but eventually decided that we were too early stage,” he said. “They were not interested in seed funding.”

Pologe and his partners are certainly not alone in the venture capitalists’ rejection pile. The company stands out because their business plan actually made it to a venture capitalist’s desk.

Venture capitalists are notoriously an elusive audience, and tough economic times have magnified the problem.

Startup companies not attractive

“If a company is counting on VC funding, they’re in a world of hurt,´ said Kathy Kregel, executive director of the Fort Collins Virtual Business Incubator. In today’s market, startup companies are particularly uninteresting to venture capitalists, Kregel said.

“The people seeking investment understand that,” she said. “They aren’t even bothering to try to get VC funding.”

Kregel said companies involved in the Fort Collins incubator have had better luck with angel investors and private offerings.

“I’m suggesting they grow slowly and boot-strap it or seek out private investors,” she said. “They’ve got to have a Plan B. They have to slow things down and grow revenue with a minimal amount of money.”

Ken Weil heads up Rose Biomedical Development Corp., a Denver-based incubator for new medical technology. The group helps its members secure funding from traditional venture-capital funds, corporate partners and the National Institutes of Health.

“For the time being, it’s very hard to access private equity capital,” Weil said. “We are fortunate that we have three different sources that we use.”

Weil said VCs aren’t investing in new deals but rather focusing on keeping previous investments afloat.

Reinvestment more likely

“They’re reinvesting in B, C and D rounds of companies they’re already invested in instead of getting into A round deals,” he said. “I don’t think there are any clear signs as to when that’s going to change.”

This is certainly a change from the dot-com bubble years. In fact, a study commissioned by the National Venture Capital Association showed that, in 2000, venture-capital-funded companies contributed nearly $1.1 trillion to the gross domestic product accounting for 12.5 million jobs.

But as everyone knows, Toto, we’re not in Kansas anymore.

“Private equity markets are so tied into the performance of the public markets,´ said Don Fairbanks, a Fort Collins-based business consultant. “As go public markets, so goes private equity.”

Fairbanks served two years as chief financial officer for a Texas-based venture-capital firm.

“It’s a very tough time getting venture capitalists to open up their pocketbooks,” he said.

“They’re having to fund their existing portfolio companies much longer than initially intended and at higher levels than initially expected, and the IPO market has all but dried up in the last couple years.”

While companies seeking funding are having trouble, venture-capital firms are running into the same wall.

“There’s a scarcity of available capital to invest,” Fairbanks said. “The ability of VC funds to attract new money from institutions and individual sources is difficult because of the status of the economy. Clearly, there are funds who are winding down and deciding not to continue funding new deals.”

As a result, more companies are forced to pull at their own bootstraps, backing business plans with money from family and friends, debt financing and SBA loans. “All of that generally means much lower funding, which translates to downsized business plans, a longer time to get to market and slower growth,” Fairbanks said.

Better climate in ’03?

Still, many in the industry suggest that venture-capital investment has to improve because it couldn’t be any worse than last year.

“No matter where you looked in 2002, you couldn’t find a silver lining,´ said Jim Conboy, chair of the Colorado Venture Capital Association and partner in the Denver-based venture-capital firm Wolf Ventures.

“Basically, there was no liquidity, no returns, fund raising was tough and valuations are down,” he said. “I’m not necessarily excited about prospects in ’03, but most likely it’ll be better in ’03 than it was in ’02. Most people agree the worst is behind us.”

Venture capitalists are traditionally from the glass-is-half-full school, and Conboy exemplifies that. “On the other side of the coin, you could look at it as a great time to start a business,” he said. With a larger talent pool willing to work for less, combined with cheaper office space, companies don’t need to raise as much money as they thought they needed two years ago, Conboy said.

Dave Dwyer, general partner in Fort Collins-based Vista Ventures, agrees that 2003 should see more VC investing than 2002.

“Companies that were not able to get funding in the last 18 months but were able to make progress in their business should come back to the investors,” Dwyer said. “But they should make sure the business plan they submit has been reviewed, revised, very well tested and carefully thought through.”

Dwyer and other venture capitalists concur that while the investment drought has slowed the pace of growth, it’s had positive effects as well.

Fund-seeking companies, they say, are presenting more concise plans with focused targets, backed by better-qualified management teams.

And those who haven’t caught the attention of venture capitalists are working harder to scrutinize every dollar spent and seeking other funding outlets.

For example, Kestrel Labs applied for a Small Business Innovation Research grant, which is a government program dedicated to stimulating technological innovation in the private sector. The company scored well on an initial assessment, and Pologe said a grant from the government could make the company more attractive to venture capitalists down the road.

“Their conclusion is that we have an excellent product concept and a high potential for commercial success,” Pologe said. “It’s a strong affirmation of our work.”

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