VCs trim risk from funding strategies

Staff Writer BOULDER — With $3.9 billion invested nationwide in 464 financing rounds, venture capital investment in the third quarter of 2002 was at its lowest level in four years. Given the dot-com bust and economic downturn of the past few years, this finding by Ernst & Young and VentureOne’s U.S. venture capital survey should come as no surprise.

Venture capital (VC) companies in Boulder and Broomfield counties agreed that the past few years have been disappointing, and no one expects 2003 to be a banner year. Opinions differ on how much success their investments will bring them, but they are all hanging tough.

Most are staying with strategies that have worked in the past.

Tom Washing, a partner at Boulder-based Sequel Partners, would continue to fund early-stage technology startups in the Front Range.

Partner Kyle Lefkoff said his firm, Boulder Ventures Ltd., would continue its interest in early-stage information technology and life sciences companies in Boulder County.

Elliott Bouillion, a partner in Murphree Venture Partners’ Boulder office, said his focus would remain on software applications companies, semiconductor and optics companies, and companies that produce telecommunications technologies.

Ralph ?Chris? Christofferson, a partner in Menlo Park, Calif.-based Morgenthaler Ventures’ Boulder office, said he would have the same emphasis as last year — life science interests in the areas of biotechnology therapeutic product companies and medical device companies.

Roser Ventures in Boulder and Mobius Venture Capital in Superior will shift gears a bit in 2003.

General Partner Chris Roser said Roser Ventures would continue to invest in companies with ?some type of patentable technology.? But he also said 2003 would be the year of diversifying his portfolio to include capital equipment companies and more specialty materials. He also will be looking at later-stage companies that have real products to sell, he said. ?Customer validation is very important right now,? Roser said. ?A customer shelling out cash for a product is a validation of the product.?

Mobius Venture Capital will change direction this year, according to Brad Feld, a managing director at the firm. While other area VCs took on at least two new companies in 2002, Mobius made only one new investment. In 2002, Mobius turned inward and spent its energy working on its existing portfolio. In 2003, ?We are able to pick our heads up and look at new investments,? Feld said. Mobius is specifically looking at early-stage information technology management software companies and later-stage software product or services companies, he said.

Colorado Venture Management in Lafayette will lay low in 2003, said Gary Bloomer, a partner. ?We’re in year four of a 10-year funding cycle,? Bloomer said. ?We’re fully deployed on our current fund, so we won’t be making new investments until we raise fund six.?

VCs will spend about the same amount of money in 2003 as they did in 2002. Typical deals for area VCs are between $250,000 and about $3 million. Mobius is the biggest spender, with some investments reaching $5 million, Feld said. Morgenthaler’s Christofferson said his firm doesn’t reveal specific financial information.

In terms of 2003 deals, most area VCs are considering one or two new investments while continuing to support the companies in their portfolios.

Sequel is looking at a few more deals than the average Boulder County VC. Washing said he thought the firm would fund five or six new deals.

The general outlook for investment opportunities in 2003 ran the spectrum from slightly negative to moderately positive.

Colorado Venture Management’s Bloomer expressed pessimism about the year to come. VC funding won’t pick up until the public stock market and mergers and acquisitions activity pick up, he said. ?We’ve got to look for some improvement in some of those before we see any improvement in any seed-stage capital,? he said. ?They’re the dog that wags the tail.?

Boulder Ventures’ Lefkoff doesn’t see a turnaround this year. ?We’re going to fight a war, and there’s a lot of uncertainty in the marketplace,? he said. ?I’m pretty sanguine about the outlook for 2003.? Lefkoff also said with the depressed market, it’s hard for young companies to find exits like going public or being acquired. However, since values are low there’s opportunity to make money. ?That’s the yin and the yang of investments these days,? he said.

Mobius’ Feld believed there will more new investment activity as people hone their portfolios. He expressed concern for VC firms that are still hanging onto companies that don’t have a chance. ?The problem is that there are a huge number of companies funded before the downturn that don’t deserve to live,? Feld said. ?They aren’t real businesses, but they are still around because VCs have been optimistic.?

Sequel’s Washing thought 2003 may be better than 2002. ?A lot of the tough stuff is behind us in terms of shutting down companies that were marginal and taking our lumps,? he said. Investments should pick up because, ?Valuations are very reasonable today. There’s talent looking for jobs, and space is available,? Washing said. However, Washing isn’t ready to say there will be a turnaround. ?There is a fair amount of trauma in the venture community,? he said. ?People are reluctant to invest because they got burnt a few years ago.?

Murphree’s Bouillion thought there would be opportunities for investing in more serious companies. Although there’s a reduced deal flow, he said, the deals he is seeing look good. ?We’re seeing serious entrepreneurs and some very experienced people with good ideas,? he said. ?They are focused on customers rather than market share, and proving out their idea and business model right away.?

Christofferson was the most optimistic of the bunch. Since Morgenthaler focuses exclusively on life sciences, the firm didn’t experience the information technology malaise of the past few years. ?The situation has been much more stable in the life sciences area, although overall valuations in the life science area have come down along with the market,? he said. ?Ironically, this makes for a good investment opportunity since prices are low while the quality of companies has remained high.?Contact Caron Schwartz Ellis at (303) 440-4950 or e-mail csellis@bcbr.com.

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