Venture capitalists here say that if the companies they invest in don't go public or get acquired with greater frequency than they are today, they could face a drought in available capital to invest in new ventures. That, they say, would be too bad, because entrepreneurial activity here appears to have remained strong.
Nationally, initial public offerings (IPOs) and mergers and acquisitions of companies backed by venture capitalists are on pace in 2008 to be at their lowest total this decade, says Tom Simpson, managing partner of Northwest Venture Associates LLC, of Spokane.
Such transactions, called "liquidity events," are the main ways that venture capitalists and angel investors get their money back after investing in a company, and they often reinvest that return in other ventures, Simpson says.
The National Venture Capital Association reports that only six venture-backed companies went public in the U.S. in the first three quarters of this year, compared with 55 in the year-earlier period. Five of those six IPOs occurred during the first quarter.
Meanwhile, 73 venture-backed companies were acquired in deals with disclosed values during the first three quarters of this year, down from 117 in the year-earlier period, the association says.
The total value of all disclosed liquidity events for the first three quarters of this year was $11.7 billion, down 56 percent from $26.6 billion during the year-earlier period, it says.
Simpson says the shining star here, though, is the roughly $300 million sale of Spokane Valley-based World Wide Packets Inc. to Ciena Corp., of Linthicum, Md., that was completed early this year. The World Wide Packets deal is one of the top 10 liquidity events nationally for a venture-backed company so far this year, he says.
Simpson manages three venture capital funds. Late last year their combined published total value was $172 million. He declines to disclose their current value, but says when conventional equity stocks are down, "you can assume a portfolio of equity in much more early-stage companies is down as well."
Northwest Venture's portfolio of more than a dozen investments includes GreenCupboards Inc., of Spokane, and Intrepid Learning Solutions, of Seattle.
John Pariseau, managing partner of WIN Partners LLC, a Spokane "angel" investment fund, says the current national economic crisis shouldn't affect the fund in the near term.
"The economy is background noise. People with capital need entrepreneurs," Pariseau says. "In good or bad times, two guys in a garage with a good idea are willing to bet it all and ignore the general economy."
While venture-capital funds generally invest in young, but quickly growing companies, angel funds seek involvement with companies just as they're starting up, Pariseau says. Both types seek some management or advisory role in the companies in which they invest.
WIN Partners recently signed an investment deal with GeoData Technologies Inc., a Sandpoint developer of Web-based virtual touring and mapping software for use in the real estate industry.
Other companies in which the five-year-old fund has invested include Blue Water Technologies Inc., of Coeur d'Alene; Spray Cool Inc., of Liberty Lake; and GenPrime Inc., of Spokane.
Though some companies in the fund's portfolio are showing promise, the fund hasn't had any liquidity events so far. Investors should be prepared to be involved in a company for six to eight years before it will be mature enough for a liquidity event, Pariseau says.
"It definitely takes longer than it did in the late 1990s," he says.
Pariseau declines to disclose the value of the WIN Partners fund, which has more than 50 investors, mostly local.
Connect Northwest, a Spokane nonprofit that advocates entrepreneurship in the Inland Northwest, helped established Delta Angel Group here to provide entrepreneurs with access to capital.
Delta Angel Group
"Delta Angel Group isn't a fund, but a group with 27 members, including 15 to 20 core investors," says Mike Wilson, Connect Northwest's interim executive director. Most of the group's investors have put $25,000 to $500,000 into the fund, its Web site says.
The group entertains 10 presentations a year from startups that are seeking cpital and currently is in discussions with two ventures for potential investments, Wilson says. It focuses on Inland Northwest entrepreneurs, although it has relationships with angel groups in Seattle, Boise, and Portland.
"Angels traditionally like to stay close to home where they can have an advisory role and provide assistance to companies," he says.
The five-year-old Delta Angel Group also hasn't had a liquidity event yet, Wilson says.
"The exit strategy is the biggest wild card for angel investors," Wilson says. "I would hope IPOs come back. Corporate acquisitions are more viable right now, but every company with cash is sitting tight."
Simpson says the current generation of venture-backed companies, like children, seem to require more care and feeding than earlier generations.
"Because of the current economic environment, children are hanging around longer," he says. "Venture funds are like homes with 30- or 40-year-old children."
Simpson advocates a change in the conventional venture-capital model, because companies are taking longer to mature to an optimal position for a liquidity event.
He's developed a venture-capital model he calls an evergreen fund that encourages cash flow to the venture fund from a developing company, which the investor could receive as a share of distributions or reinvest back into the fund so business decisions wouldn't be overly influenced by expectations of liquidity events.
Simpson says he's not focusing on fundraising in the near term.
"It's difficult to raise money, and the valuation is going to be low," he says.
On the other hand, Simpson says, partly because valuations will be low, "now's a terrific time to invest."
More importantly, companies likely will be started now by people who have true passion for a business, he says. "They recognize they are starting a business in a difficult time."
Wilson also is optimistic about the future of entrepreneurial activity here.
"There will be tremendous opportunities for sponsors and startups in the next few years," he says.
If the economic downturn lasts, WIN Partners likely won't attempt to raise more funds anytime soon, but if the economic crisis "is just a blip on the radar screen, I think we'll try to raise more funds in the reasonable future."
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