As IPOs Pick Up, So Do Start-Up Financings

5Square Systems Corp. of Westlake Village calls its sales software DealSnap because, Chief Executive Yuri Pikover boasts, car dealerships that use it will be able to “make a deal in a snap.”

When Pikover and his executive team met with venture capitalists this year, they found it wasn’t a snap to snare expansion funding -- but ultimately walked away with $12.3 million.

“Venture capitalists have high expectations on the strength of the management team and the solidness of the business plan,” says Pikover, a 42-year-old tech industry veteran. “But for strong teams with a strong vision, the money is there.”

In fact, venture funding perked up in Southern California during the first quarter, as 64 private companies attracted a total of $465.5 million, according to data reported Monday.

The sum was a 5% increase from the fourth quarter and a 91% jump from a year earlier, when activity was depressed by the onset of the Iraq war, according to the MoneyTree survey from PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Assn.

The Southland tally covers Los Angeles, Orange, Santa Barbara, San Diego, Riverside and Ventura counties.

Though venture financing nationwide has plunged from the days of the technology mania in 1999-2000, it has been slowly recovering in recent quarters as financiers -- and their investors -- gain confidence in new businesses and in the economy.

The rebound bodes well for younger companies struggling to get their businesses rolling.

Nationwide, venture funding totaled $4.6 billion in the first quarter. That was below the fourth quarter’s $5.2 billion but above the $4.2 billion raised a year earlier.

One reason more venture investors may be stepping up: the thawing of the market for IPOs, or initial public stock offerings.

Typically, venture capitalists buy stakes in young companies with the idea of cashing in when a start-up goes public through an IPO or is acquired by another firm.

In the ruins of the tech stock crash of 2000-02, few companies were able to tap the public market. But demand for IPOs has bounced back over the last year.

“The fundamentals of a healthy venture industry are aligning: a viable exit market, interesting opportunities in a variety of sectors and sufficient capital to fund the most compelling companies,” said Mark Heesen, president of the NVCA.

Encino’s Ascendent Telecommunications Inc., whose technology helps businesses and government agencies with mobile communications and disaster recovery, raised $7 million in the first quarter largely to beef up its sales and marketing, said Stephen Forte, 37, founder and president.

Ascendent markets its products mainly through partners such as Nextel Communications Inc., Toshiba North America and Canada’s Telus Corp., but it plans to sell directly to customers as well.

Through Telus, for example, Ascendent sells to FedEx Corp. for use in Calgary, but Forte said he believed the delivery giant could become a bigger customer with the right pitch.

Ascendent’s products relay calls to remote phones, pagers and computers, and provide backup systems and mass notification in emergencies. The company, whose 2003 revenue was less than $10 million, expects that to at least double this year and expects to be profitable in early 2005, Forte said.

He described a “weird environment” for venture funding these days, as financiers are looking to loosen their wallets yet remain wary after the technology sector crash.

“The venture capitalists are so skittish, it creates a herd mentality,” Forte said. After venture firm ComVentures of Palo Alto offered Ascendent a deal “term sheet,” other investors rushed to put money in, he said. The company turned a number of them away.

“Everyone started saying, ‘But us, too! But us, too! We were going to send you the term sheet the next day,’ ” Forte said.

At 5Square Systems, Pikover also turned down some would-be investors, after attracting Northwest Venture Partners and Storm Ventures, both of Palo Alto, as the firm’s main backers.

The company plans to officially launch DealSnap by late June. The software service, which will rely on monthly subscriptions to generate revenue, has been used since February by the sales force at one car rental agency and three independent auto dealerships in California, which 5Square declined to name.

Its software helps dealers manage each step of the car selling process, he said, from tracking prospective customers to finalizing the financing. A salesperson need not waste time offering a buyer a loan that he won’t qualify for or marching back and forth to his manager’s office, Pikover said.

As the deal is being negotiated, a manager in another office can view an array of financing and lease options that meet a customer’s requirements -- such as $3,000 down and $400 a month in payments -- and steer the salesperson in the right direction.

The average buyer spends about four hours at the dealership, Pikover said, adding, “Most people would rather have a root canal.” DealSnap can cut that time in half, pleasing car buyers and dealers alike, he said.

Venture investors, at least, were sold.