Venture Capitalists Are High on Low Tech Now

One entrepreneur presented plans Tuesday for what he billed as an innovative type of home basketball backboard. Another described his dream of a business that prints the name of newlyweds on wine bottles to impress their wedding guests.

In the past, many venture capitalists might have sniffed at such unusual ideas for a start-up business. They were more likely to get excited about entrepreneurs promising breakthroughs in computers or biotechnology--a company with the seeds of the next Apple Computer.

But high-tech has lost some of its luster of years past, and investors now are more willing to look at less flashy manufacturing or service businesses that they might have ignored a few years ago, according to speakers at a venture capital conference at the Irvine Marriott hotel Tuesday.

“We’re seeing a willingness on the part of many venture capitalists to look at many different interests,” said Lee McCracken, vice president of 3i Capital Corp., a Newport Beach venture fund.

Venture capitalists provide money in the early stages of development for young companies or for firms that are trying to turn around their operations. These investors are willing to take high risks in the hope of reaping large financial rewards if a young company zooms to success.

From a near-standing start in the 1970s, venture capital proliferated into a financing pool worth billions in the early 1980s as small firms catered to the personal computer craze and developed other high-tech gadgetry.

Panelists at the Orange Coast Venture Group’s annual conference said that the amount of venture capital financing has dropped since the high-flying days of the mid-1980s, although it still remains an important source of financing for new companies.

Orange County remains one of the nation’s centers for venture capital with funds totaling nearly $1 billion, although not all of that money is invested in county companies, panelists said.

Though many try, only a handful of businesses have the qualities that attract venture capital, the speakers said. Kenneth Deemer of Interven Partners, a Los Angeles venture capital firm, said Interven may fund only about half a dozen companies from about 1,000 proposals.

With venture capital firms willing to pour from $1 million to $3 million into a promising company, the investments can potentially turn a garage operation into a major contender--if a company has the right characteristics.

“Most of the companies we turn down are excellent business operations but not suited to venture capital,” said Standish Fleming, senior associate with the Ventana Growth Fund in Irvine. “You have to be able to build a big company, one that can stand on its feet as a public company.”

Such a company, the panelists said, should be able to seize and hold a large share of its market.

The venture capitalists say that in choosing companies for funding, they take as close a look at a company’s management as they do its product.

John Morris of First Interstate Venture Capital in Newport Beach said that a major frustration for investors is the company with a great idea but a weak management team.

“Part of the problem is we need to have people with some type of track record,” he said. “We have a lot of companies in portfolios that aren’t performing like they promised.”

Entrepreneurs seeking funding should be “doing as much homework as possible about the market and the competition,” said Alex Cilento of 3i Ventures Corp. in Newport Beach, an affiliate of 3i Capital Corp.

Randy Lunn, a partner in Fairfield Venture Partners in Costa Mesa, said he often looks to invest in a company that has the strong backing of a major customer. “Nothing beats a customer,” he said.