Venture Investors Show More Confidence in 2004
The drought is finally over -- for entrepreneurs, that is.
Reversing three years of declines, venture capital investments in new and growing companies rose 8% nationwide and 7% in Southern California last year, according to a report to be released today.
The uptick, experts said, suggests a generally healthier economy because investors have more capital to wager on promising enterprises.
“There is money available,” said Don Williams, a venture capital advisory group leader with consulting firm Ernst & Young.
“This bodes well for entrepreneurs,” added Williams, whose company prepared the report with research firm VentureOne.
Also boosting the numbers were a flurry of corporate acquisitions and a rebound in the market for initial public offerings of stock. These trends showed investors that, once again, there were available “exits,” or ways to cash out.
The report said U.S. venture capital investment climbed to $20.4 billion in 2004, compared with $18.9 billion in 2003. The number of deals declined 1% to 2,067.
The dollars are still paltry compared with the record $94.5-billion influx during 2000, but analysts said entrepreneurs should be encouraged that the string of funding declines had ended.
In Southern California, companies raised $2 billion in 2004, up from $1.9 billion in 2003. The number of financings slipped to 174 from 198 in 2003, when the average deal size was smaller.
Venture capitalists buy stakes in new or growing companies, hoping to cash in if those firms are later acquired or go public by issuing stock. Typically, VCs raise money from pension funds, endowments and wealthy individuals.
According to VentureOne’s early estimate, venture funds raised $16 billion to $17 billion last year from their partners, a sharp upswing from the $8.7 billion raised in 2003.
The outlook for the current year remains strong, Williams said. Venture capital firms have an estimated $70 billion stockpiled and available to deploy in 2005, he noted.
Despite last year’s overall upturn, venture investing fell 15%, to $4.5 billion, in the fourth quarter compared with the year-earlier period. Williams attributed that drop to a rush of deals closing in the third quarter and delays that pushed some transactions into this year.
The report also noted a slight increase in funding for fledgling companies, as opposed to those that have been operating for several years. So-called seed and first-round funding deals represented 33% of funding activity, up from 31% in 2003.
The biopharmaceutical segment was popular last year, with $4.3 billion invested, a 20% increase from 2003.
Technology companies also drew more interest, raising $11.3 billion, up 9%.
The San Francisco Bay Area continued to garner the most venture activity of any region in the country. It accounted for about a third of all deals, with 638 of them attracting $7.1 billion.
In Southern California, Pasadena-based online matchmaker EHarmony.com Inc. attracted a $110-million infusion in December in what analysts called a vote of confidence for the online dating industry.
Santa Monica’s Business.com Inc., which runs a search engine geared to business customers, raised $10 million from its Silicon Valley backers.
Among smaller fourth-quarter deals, Valencia-based H2scan, whose products detect hydrogen leaks in industrial machinery, batteries and power systems, landed $2.5 million from investors. Two of the funding sources were local “angel” groups: the Pasadena Angels and the Tech Coast Angels.
Angel networks are made up of wealthy individuals, many of them entrepreneurs themselves, who offer technical help as well as money to emerging companies.
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They got the money
A sampling of Southern California companies that received venture funding in the fourth quarter of 2004
*--* Amount Where Company (in millions) based EHarmony $110.0 Pasadena GeneOhm Sciences $26.0 San Diego DexCom $22.5 San Diego Peregrine Semiconductor $17.6 San Diego Sequoia Communications $15.0 San Diego Chimerix $11.0 La Jolla Business.com $10.0 Santa Monica Catalytic Solutions $10.0 Oxnard Pentadyne Power $8.0 Chatsworth Ceyx Technologies $4.5 San Diego Oryxe Energy $3.0 Irvine H2scan $2.5 Valencia
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Source: Ernst & Young
