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Venture capital to local companies passes $47 million in first quarter

Venture capital and angel investments are starting to pick up after a lull in the last few years, because of a strengthening economy and the ability to fund a company with a lot less capital than was needed historically.

In the first quarter of 2011, a total of $47.35 million was invested in North Bay companies through venture-capital funding, according to Dow Jones VentureSource, which tracks investments from venture capital firms to startups in all sectors of the economy. By comparison, first-quarter investment last year totaled $59.27 million; in 2009, $13.98 million; in 2008, $85.9 million; in 2007, $45.30 million and in 2006, $95.32 million.Funding activity in the first quarter tracks fairly closely with activity in a given year, according to Dow Jones VentureSource. In the first quarter of this year, venture capitalists invested locally in business financial services, consumer services, energy and utilities, healthcare and information technology companies.

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"These days, you can have a world-class company anywhere and can start it with very little money," said Dan Lankford, managing director at Wavepoint Ventures. The firm provides early-stage capital to "distributed innovation" ventures and is connected to a business incubator in Rohnert Park. Wavepoint defines distributed innovation as the ability for people to innovate almost anywhere by outsourcing non-core functions and using the Internet as a marketing and collaboration tool.

Because companies do not have to go out and purchase a huge number of computers and can use an engineer part time, the overhead has dropped significantly for a business, he said. For a typical software services company that may be creating an app for a smartphone, it may be possible now to literally get business going with just a credit card, he said.

"If you are looking at starting a company that makes medical devices, it used to be you needed to look for a lot of capital," he said. "Now you can get a company started for less than $10 million."

Mr. Lankford said the North Bay is a particularly interesting area and attractive to angel investors and venture capitalists.

"We like it here partially because it has the Sonoma Mountain Business Cluster and Sonoma State University," he said. Wavepoint offers mentoring and other services to businesses in the cluster.

"Now that we have a resource like SMBC, it becomes a catalyst and a nucleus for business," he said.

The Sonoma Mountain Business Cluster is a nonprofit business incubator located in Rohnert Park. Its function is to assist entrepreneurs and startup companies in achieving success through mentoring and education.

Bill Silver, dean of the School of Business and Economics at Sonoma State, said Wavepoint has a unique and interesting focus on investing locally, and supporting efforts to foster entrepreneurship in the North Bay.

"They were our partners in the business plan competition," he said.

The business plan competition was part of a collaboration of The North Bay Innovation Hub, or iHub, located at the Sonoma Mountain Business Cluster and several other partners including SSU. iHub is a regional economic development collaborative formed under a state program designed to modernize California’s approach to fostering innovation and entrepreneurship.

Another group associated with the business cluster is North Bay Angels. It's an angel investor network focusing on building high-growth technology local businesses.

 

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"When there is a promising product in a rapidly growing market investors will come to play and are willing to take the risk and over that long a period of time," said  Steve Weiss, chairman emeritus and co-founder of North Bay Angels.

Mr. Weiss is also a general partner of Medical Technology Partners, a health care seed investing and consulting partnership that assists young companies, primarily in the medical device and technology markets.

Post-recession, angel investors are making sure the companies continue to grow and prosper, but they are a lot tighter with their financial assets, he said.

"I think in the last three years angel investing has gotten pretty tough for companies," Mr. Weiss said. "Thirty to 40 percent are sitting on the sidelines, and the venture capitalists have also been sitting on the sidelines. The pricing is not as good as it has been in normal times."

But it is beginning to pick up.

"You are beginning to see more and more activity here in the North Bay," Mr. Lankford said. "You are also seeing a revival in the VC industry in general. Typically the exit plan is for the startup to be sold off to larger companies that underinvest in new product development during a recession."At the end of the recession, he said, those larger companies need to shore up their offerings and the easiest way is through an acquisition."We see this cycle over and over again," Mr. Lankford said. "This is the time when the investments are made that actually make big bucks. It becomes a very exciting time."Last year,  Keiretsu Forum completed 16 investments and this year they are above that pace and will likely fund more, according to Randy Williams, who founded the San Francisco-based "milestone investing" group in 2000. It has 800 members worldwide and 35 investors locally. 

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"I like putting a little bit of money in and watching the company honor their milestones, then give invest more. It mitigates the risk for the investor and gives the company a clear signal that if they are meeting goals they will get enough capital."

He said most angel investors do what they do because they love the entrepreneurial spirit and many of them were entrepreneurs at one time or another.

"We are tougher and wiser having been through it and we look for startups run by people who are seasoned but coachable," he said.

Keiretsu and North Bay Angels offer investors with expertise in the companies markets as members of their boards to help the entrepreneurs. It works well most of the time, he said.

"The real struggle comes in when there is no communication," Mr. Williams said. "Problems don’t kill business. Surprises do."