Local VC investments in 4Q lowest since tech bust
Private investment in local companies in the fourth quarter of 2007 was the worst since the Dallas Business Journal begin doing surveys in 2000, as venture capitalists largely shunned area startups.
Local companies raised $82.7 million between Oct. 1 and Dec. 31, down from $225.5 million from the same period in 2006 and $202.15 million for the third quarter of last year.
The previous low for the DBJ’s private investment survey happened in the third quarter of 2002, during the dark days of the technology and telecom bust. Local companies landed $109.88 million in that quarter.
The poor quarterly showing ended what was shaping up to be a strong year. Area companies raised $719.95 million on the year, down from $806 million in 2006 but better than the $630.3 million in 2005.
But venture capitalists remained tough nuts to crack for investors, disclosing only $49.32 million in investments locally. Only one of those deals was a first-round transaction: the $4 million infusion that was part of a $10 million commitment to Irving’s Vixxi Solutions.
The poor investment picture contrasted with what is happening nationwide. According to a survey by Dow Jones VentureSource, VCs invested $7.3 billion in 650 deals during the fourth quarter, marking a 15% growth in investment dollars, and a 6% boost in deals from the fourth quarter of 2006. For the full year, venture investment hit $29.9 billion nationwide, up 8%, on 2,648 deals, which was up less than 1%.
The problem, according to observers and VCs: The D-FW Metroplex is largely lacking in many hot areas for venture capitalists, such as health care and so-called “clean technology,” an umbrella term for products or services that make things work better while reducing the impact on the environment.
Although the Metroplex has a number of hospitals and the University of Texas Southwestern Medical Center at Dallas teaching hospital, it doesn’t have many startups in areas of interest to VCs, such as biopharmaceuticals.
Roman Kikta, managing partner of Mobility Ventures in Dallas, says there is also much interest for applications for new media content. “Unfortunately for our area, that’s not where the industry is the strongest in Dallas,” he says.
Entrepreneurs must step up
Entrepreneurs need to “rise to the occasion to attract venture dollars here,” Kikta says. “What we need to do is drive quality deals here. It’s the quality of opportunities that will drive venture capital dollars.”
Meanwhile, VentureSource data shows that information technology, which the Metroplex does well in, was roughly flat nationwide compared to 2006. Some $14.8 billion was invested last year — up 2% — in 1,530 transactions, down from 1,537 in ’06.
Mark Sinclair, partner in charge of strategic growth markets in Dallas for Ernst & Young, notes that during the technology and telecommunications boom, the Metroplex outpaced Austin in venture capital infusions because North Texas had communications startups that drew big investments, while Austin had software firms that required much less capital.
Now that the tide has shifted, big-money communications startups are out, and businesses that are less capital-intensive, such as software, are in. The upshot: Austin’s startups pulled in roughly 50% more money in the latest quarter than D-FW’s area did. That is consistent with the pattern over the past two or three years.
Meanwhile, the credit crunch and turmoil in the debt markets have caused issues in the private equity world. Though players in the small and mid-sized end of the market report that deal flow remains strong and credit available for smaller purchases, their exits — selling companies or taking them public as a means of cashing in their investments — are a little more problematic.
“The exits are much more dependent on the debt markets,” says Dan Patterson, chairman of Transition Capital Partners in Dallas. “It’s definitely a concern … whether we’ll be able to exit at the prices we’ve been exiting at. On the other hand, we’ve been getting very positive feedback on one company we have listed at this point.”
Transition Capital officials declined to name the company, but said the price it fetches will ultimately be determined on its own merits. The firm hopes to sell the business near the end of the second quarter of this year.
Highlights from the fourth quarter survey include :
- AppTrigger, a Richardson maker of telecom equipment, landed the biggest venture deal of the quarter, pulling in $21.5 million from Sevin Rosen Funds, CenterPoint Ventures, Hunt Ventures, Star Ventures and other investors. Formerly known as Carrius Technologies, the company has raised a total of $47.5 million.
- Also in Richardson, Electronic Transaction Consultants Corp. nailed a $27 million investment from Autostrade International U.S. Holdings Inc., the U.S. holding company for Autostrade, a European firm that collects toll-road payments. ETC designs and implements software for collecting and billing tolls.