Venture Investing Falls Further as Firms Focus on Portfolios
By CONOR DOUGHERTY
Local venture capital investing fell more than 30 percent in the third quarter as the jittery stock market continued to wreak havoc on technology firms, according to Growthink, a market research firm.
Fifteen L.A. County companies received $121.5 million in the July-September period, down from 21 companies and $180.8 million in the second quarter. In the third quarter of 2001, $187.8 million was doled out to 21 L.A. companies.
The average deal size was $8.1 million, down from $8.6 million last quarter and $8.9 million a year ago.
Most of the companies that received money were financed as part of a follow-on round and usually for a specific purpose, such as to service a new contract or to beef up sales and marketing operations.
“It’s better to invest in the company you know than the company you don’t know,” said Greg Martin, an associate at Redpoint Ventures in Santa Monica. Martin said investments continue to be company specific, meaning there is no hot sector receiving the bulk of the money.
As technology stocks have been battered, many venture capitalists have tried to cut down on risk by taking a greater role in the day-to-day activities of their portfolio companies.
Los Angeles software company Blue Falcon Networks, for instance, received an $8.5 million round led by the Sprout Group in Menlo Park, which installed one of its entrepreneurs in residence, Joshua Goldman, as chief executive.
“In this environment, anything they can do to reduce risk is preferred,” said Goldman, who had been chief executive of MySimon Inc. before joining Sprout Group. “The only thing getting funded right now are technologies that are already developed and proven to save money or increase efficiencies in the few industries still spending money on technology.”
Blue Falcon, which counts Virgin Entertainment Group’s Radio Free Virgin among its customers, sells software that promises to make it faster and cheaper to distribute content over the Internet.
At least two companies providing “supply-chain solutions” (Internet-based software linking manufacturers with suppliers and retailers) received money in the third quarter: Adexa Inc. ($15 million) and Agribuys ($5 million).
Laurence Sotsky, Agribuys’ vice president of sales and marketing, said the company received money to service a new contract it signed with Ahold, the Dutch food conglomerate that owns the Giant Food supermarket chain along the East Coast.
“In order to meet the requirements (of the contract) we had to go and invest in new hardware,” he said.
Agribuys sells software linking farming companies with food distributors and supermarkets via the Internet.
By far the biggest deal announced was $24 million that went to Dune Networks Inc., an L.A. company whose semiconductor products aim to make it possible for Internet service providers to handle more traffic. The deal was rare, in that the money was Dune’s first VC investment to date.
“It was tough, but it was possible,” said Michal Kahan, Dune’s vice president of marketing and product development.
Growthink compiles its information by scanning news reports in addition to surveying companies and venture capitalists. All numbers are verified with the companies listed. Growthink only provides information for private, U.S.-based firms that have received at least $300,000 in equity financing.