Risk Capitalists Venture Into More Established Companies : Investment: The tight credit market has made it even more difficult for start-up entrepreneurs to secure financing.
The current credit crunch may be bad news for bank borrowers but it means some opportunity for venture capitalists.
In a panel discussion about the state of their business here Tuesday, several venture capitalists said that as banks abandon their traditional corporate customers, some high-quality companies are turning to risk funds for financing--and getting it.
“Companies looking for external financing will find a more receptive attitude among venture firms than banks,” said John W. Ulrich, senior vice president of 3 I Capital Corp. of Newport Beach.
Such optimism was voiced repeatedly during a 90-minute panel discussion by eight of the county’s most prominent venture capitalists. The upbeat mood comes despite a substantial drop in their investments in the past five years.
While the value of investments may be down, the quality of borrowers knocking on risk-capitalist doors is up. And that’s because many banks, already hobbled by bad real estate loans, are turning away even low-risk borrowers.
So with tight credit, many venture capitalists say they’re finding more well-managed companies with unique products in the market than in the last two years. No longer are they looking just at high-risk start-ups.
“In the coming 18 months, I expect it will be a good time to invest in good, growth companies,” said John Blackburn, managing partner of TBM Associates Inc., a Newport Beach venture fund that invests in young companies with annual sales of at least $5 million.
Typically, venture companies provide money to start up firms or young companies that need new capital for expansion. In making the high-risk investment, the lender typically demands some say in running the company and a large equity position.
The tight credit market, however, may make it nearly impossible for many untested start-up companies to get off the ground. During a recession, venture capitalists--like other lenders--are likely to stick with the sure thing, rather than risk a big loss.
“There’s still a lot of venture capital funds available now, but they’re putting their money into a more established company, a company that has a product in the market or one that is already earning revenue from its products,” said L. Charles Hobbs, president of Hobbs Development Associates Inc., a Newport Beach company that provides seed money for young, emerging growth companies in Orange County.
Still, about 25 entrepreneurs sought financing Tuesday by presenting their plans to the 10 venture capital firms at the luncheon sponsored by the Orange Coast Venture Group, a nonprofit organization that brings companies and venture capitalists together.
Marlene Siersema, vice president of Sage International of Huntington Beach, came looking for funds to distribute 12 “environmentally friendly” beauty products to beauty salons nationwide.
Ralph O. Muncaster, president of Brighton Publications in Irvine, wants backing to fulfill his dream of introducing a quality Around Town magazine that will catalogue all the sporting events, swap meets and other social and civic schedules in Southern California.
A key element that venture companies assess is the quality of a company’s management, said Michael Henos, vice president of Newport Beach-based 3 I Ventures Corp., which has invested about $30 million in small computer and medical companies.
“A management that has the reputation of stability and ingenuity and can churn out unique products has a good chance of catching the attention and respect of venture capitalists,” he said.
But even good companies are competing for fewer funds. Panelists said venture companies also are finding it difficult to raise financing because the return on investment has been shrinking, said Guy Nohra, an associate at the Costa Mesa office of Burr, Egan, Deleage & Co.
“In the last eight years, the return on investments has been shrinking to the current average of about 3% to 5% return annually on investments,” he said.
In the last two years, venture capitalists have turned to Europe and Asia to raise capital for their investments, said Nohra, whose company financed the growth of Aerotest Inc., an aircraft transport maintenance company in Irvine.
Unless the rate of return on investments increases, Ulrich of 3 I Capital said venture companies will raise less money in the next two years than they were able to in the last five years.
Venture Capital Investment in O.C. More than half of the venture capital dollars invested in Orange County companies during the past nine years went to three industries: medical products, computers and health care. Investment peaked in 1986 at $188 million but has since declined sharply. Investment by Industry, 1982-1990 Percent of $920 million total Health Care: 15.4% Computer Hardware: 20% Medical Products: 20.5% Other: 7.8% Biotechnology: 2.9% Computer Software: 4.6% Communications: 55 Consumer Products: 6.3% Industrial Products and Machinery: 7.4% Other Electronics: 10% Annual Totals in millions of dollars 1983: 97 1984: 68 1985: 82 1986: 188 1987: 108 1988: 131 1989: 71 1990: 76 Source: Ernst & Young
