Seed Money Grows : Venture Capital Shows Healthy Jump in Late 1994--a Good Economic Sign

By ROSS KERBER and HOPE HAMASHIGE

March 20, 1995 12 AM PT

SPECIAL TO THE TIMES

IRVINE —

As computer programs get more complex and more costly each year, John Wark finds it tougher to raise enough cash to spur the growth of his young software company.

Continuus Software Corp. has grown since receiving $1.5 million in seed money in 1991, but it’s still too small to garner the cash it needs through bank loans or a public offering of its stock.

“As a technology company, you usually can’t get loans from banks, and if you could get one, the rates would be very high,” Wark said. “You’re not making a profit, you’re not cash-positive, you’re not all the things that bankers like to see before they give you money.”

But late last fall, Continuus got a big boost as venture capital firms invested $2.5 million to move the company along.

Continuus was one of 23 Southern California companies that raised a total of $141.1 million from venture capitalists during the last quarter of 1994, according to a nationwide survey by the Big Six accounting firm of Price Waterhouse. That is a 68% increase over $84.2 million raised in the third quarter.

“When people put money into venture funds, it’s an indicator that there’s a positive feeling about the economy, a feeling that it will be growing,” said Mike Larrenaga, managing partner of Price Waterhouse’s high-technology group for Southern California.

The fourth-quarter funding went to a wide range of privately held companies from low tech to high tech and from start-ups to young, growing operations like El Dorado Communications Inc. in West Los Angeles. Experts said they expect more venture capital money to be available, especially for young, growing companies with track records.

“Seed capital is still hard to get,” said Tiffany Haugen, director of the Accelerate program at UC Irvine, which helps budding high-tech firms with marketing and financing.

Venture capitalists “are still a little risk-adverse,” she said. “A lot of them would like to see sales already.”

In the fourth quarter, $62.2 million went to 13 firms in the greater Los Angeles-Orange counties area, and $79 million was invested in 10 San Diego County operations.

Nationwide, venture capitalists invested $1.5 billion in 351 companies nationwide, said Price Waterhouse, which started its survey with last year’s third-quarter investments.

For Continuus, venture capital has meant the opportunity to keep in sight a rival that, like the company in Irvine, also feeds corporations the software tools they need to improve their computer programs for such business needs as processing orders and controlling inventory.

That competitor, publicly held Atria Software Inc. in Atria, Mass., earned $800,000 in 1993 on sales of $9.3 million, results that Continuus doesn’t expect to equal until next year at the earliest.

Continuus started out in 1987 as Caseware Inc., which resold computer hardware to companies that wanted to supplement their computer networks. As a small part of that work, Continuus also developed software tools to help their customers run their computer programs quicker and easier.

But by 1991, that software division had become more profitable, partly because heavier competition was squeezing it out of the hardware resale business. Continuus dumped resales to focus on its software, and obtained $1.5 million in seed money from two private investors, Sol Zechter and Fred B. Cox, who remain on the company’s board.

“Private money can be the best kind, especially when you need to get it quickly” for research and development, Wark said.

But the company soon ran out of that money and figured it wouldn’t find additional investors fast enough to help it open European offices and develop new products. So Continuus began courting venture firms last year, eventually picking up $7.5 million for all of 1994 from three groups led by Norwest Venture Capital, a subsidiary of the large Norwest Corp. banking company in Minneapolis.

El Dorado Communications is burning through that amount fast. In 1993, after scouring the venture capital markets for more than two years, the West Los Angeles company that operates Spanish-language radio stations began to pick up some money.

But it wasn’t until the fourth quarter last year that it made a killing. It landed $14 million in venture capital investments and loans.

With the proceeds, El Dorado doled out the largest sum yet to buy a Spanish-language station in Texas, paying $11.5 million for KQQK-FM in Houston. It already owned KXTJ-FM in Houston, and the KQQK acquisition gave it the market’s top two Spanish-language stations, both of which play the country-polka Tex-Mex style Tejano music.

For a while, though, it didn’t look as if El Dorado was going to get off the ground. For several years, the company’s president, Thomas Castro, and its chief financial officer, Albert Chavez, went begging for seed money to buy Spanish-language stations.

They finally picked up $1.4 million in 1993 and bought KMQA-FM in Los Angeles. The company soon attracted $1.7 million more to buy KXTJ, and received $4.4 million in two subsequent investments by venture capitalists.

Chavez said that in the four years El Dorado has been in business, more venture capital outfits have started showing more interest in the company and the industry. Working in a particularly hot industry has helped to attract investors.

“The success of many Spanish-language radio stations, such as KLAX in Los Angeles, has been astounding,” Chavez said. “It’s good to be in a sector everybody loves.”

Times staff writer Don Lee contributed to this report.

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Funding New Venture

Southern California companies raised $141.1 million in venture capital during the fourth quarter last year, a 68% increase from the previous quarter. Software and information firms received the largest chunk. Dollar amounts in millions: Software / information

3rd quarter: $13.8

4th quarter: $44.0 Health care / biotechnology

3rd quarter: $29.1

4th quarter: $41.1 Distribution / retailng

3rd quarter: $1.2

4th quarter: $22.8 Communications

3rd quarter: $11.2

4th quarter: $15.1 Industrial

3rd quarter: $3.3

4th quarter: $11.0 Electronics / instrumentations

3rd quarter: $5.5

4th quarter: $6.8 Hardware / peripherals