SOUTHERN CALIFORNIA ENTERPRISE : Investments With a Capital ‘I’ : After Nearly Vanishing, Venture Capital Is Once More Becoming Available
It’s been tough in recent times for a young company to get seed money from private investors or even for a struggling public company to raise cash from anyone.
But Virtual Computer Corp. in Reseda picked up $75,000 recently to help it start production, and Platinum Software Corp. in Irvine won a fresh start with $13.8 million in new money.
Venture capital, once plentiful in the 1980s but nearly nonexistent in recent years, is once again becoming more available.
Altogether, 21 Southern California companies raised $84.2 million from venture capitalists during the third quarter of this year, according to the first nationwide survey detailing private investments into new, fledgling and rebuilt companies.
The cash is part of nearly $1 billion in venture capital invested in 293 mostly small, privately held companies throughout the country, according to the survey by the Big Six accounting firm Price Waterhouse. The firm plans to track venture capital investments quarterly.
Price Waterhouse, which has reported on the New England venture capital market for more than a year, rolled out its national version mainly to collect and analyze information that could be useful to its high-technology clients. But the survey also acts as a barometer of regional and national economic health, said Janet F. Boling, a Price Waterhouse spokeswoman in Costa Mesa.
“From looking at other sources, I didn’t think there was much venture capital around here at all,” Boling said of Southern California. “But when we polled $84 million, I was very surprised.”
More than $52.1 million went to 10 companies in the greater Los Angeles-Orange County area in the third quarter, and more than $31 million went to 11 San Diego firms, according to the survey. In addition, venture capitalists poured more than $228 million into 72 Northern California companies, mainly high-tech Silicon Valley operations.
Steve Casselman is happy venture capitalists are back, because he hadn’t been able to find new financing for his Virtual Computer, which builds auxiliary central processing units called co-processors that help the main microprocessor--and heart of the computer--run faster.
Casselman had won a $500,000 government contract--most of it coming in the spring of 1991--through the federal Small Business Innovative Research (SBIR) program. But that money only got him out of his living room and into an office with a few engineering employees. He needed more to develop the computer chip, produce it and market it worldwide.
“I had advertised in the Wall Street Journal for investors, and I advertised in Asian publications,” he said. “I had a lot of calls, but none amounted to much.”
Most, in fact, were crank calls, and Casselman got nowhere talking to venture capital firms and other possible investors.
But venture capitalist Tim Draper of Draper Associates in Redwood City called Casselman about two years ago to ask about another company Draper wanted to invest in. That conversation led to talks about Virtual Computer and, last year, to Draper’s agreement to invest $300,000 in return for a 20% stake in Casselman’s company. The venture firm funded $75,000 of that commitment during the third quarter.
Three months ago, Virtual Computer, with five employees, began shipping co-processors for large Sun Microsystems workstation computers. Casselman said he hopes to develop generic co-processors early next year for IBM and Apple computers as well.
His good fortune continued last month when his company won one of three SBIR Technology of the Year awards from the federal government.
Unlike Virtual Computer and most other companies attracting venture capital, Platinum Software was an established, though battered, public company. Last April, the accounting software company’s top managers resigned after announcing that revenue for the previous two fiscal years had been overstated by more than $18 million.
Carmelo J. Santoro was brought in as chief executive to restructure and revive the 10-year-old company, which was facing a Securities and Exchange Commission investigation and lawsuits by its investors.
“If I did nothing, we would have been bankrupt by August or September,” Santoro said. “I started thinking of raising about $10 million to $15 million, but with the SEC investigation and the unsettled lawsuits, there was no way I could go to a public offering.”
Instead, he called two venture capitalists he had worked with on other projects. Santoro told them Platinum was in trouble but sensed that the problems could be fixed and the company could prosper.
They balked at first, worrying that any money they brought in would go to the attorneys in the civil lawsuits. Santoro soon settled the class-action lawsuits, though the settlements are awaiting court approval. The SEC investigation is still pending.
In September, the venture capitalists stepped in. Kleiner, Perkins, Caufield & Byers in Menlo Park and New Enterprise Associates in Baltimore led an investor group that paid nearly $13.8 million for 2.5 million shares of preferred stock, which can be converted to common stock.
“This gives us credibility,” Santoro said about the investment. “The money is going to stay in the bank. I now believe we will turn the corner and show a positive cash flow during this fiscal year with the money we had left. We need the (venture capital) money in the bank to give customers confidence that this company is not in financial jeopardy.”
Start-Up Funds
Southern California companies have raised $84.2 million in venture capital in the third quarter of this year, a sign of increased availability of funds for startup companies. About a third of total went to firms in the healthcare/biotechnology sector.
Communications: $11.2 million
Distribution/Retailing: 1.2 million
Electronics/Instrumentations: 5.5 million
Hardware/Peripherals: 75,000
Healthcare/Biotechnology: 29.1 million
Industrial: 3.3 million
Insurance: 16 million
Software/Information: 13.8 million
Consumer: 4 million
Source: Price, Waterhouse
