Editor’s Note: Be sure to check out Local Tech Wire’s continuing series on venture capital and investment firms, which started Feb. 11 and runs each day, Monday through Friday. Today’s profile is Catalysta. The venture capital freeze of 2001 may not have completely thawed out just yet, but observers say the ice is starting to melt with the coming of spring.

Last year was splattered with missed earnings, crashing dot-coms, and a yearlong migraine headache for Wall Street investors. The venture capital firms are usually not susceptible to wild fluctuations in the market because they make tend to make long-term investments that bring high returns as a company grows.

But 2001 was a different kind of year.

So many venture firms had invested in dot-coms and telecommunication companies that there was no escape from the Invisible Hand’s correction. When fund managers started to realize that many of their investments weren’t going to generate revenue and were desperately in need of cash, the spending spree came to a close and the freeze contributed to an already chilly U.S. economic climate.

“We’ve become a lot more cautious and that’s causing us to take out time,” says Bu Whitmeyer, general partner with Research Triangle Ventures of Raleigh. “We haven’t made a new investment since last June, and even those were in our existing portfolio companies.”

Jeff Barber, managing partner for Pricewaterhouse Cooper’s Raleigh offices, says that last year most venture capital firms in the Triangle area became internally focused on taking care of their portfolio companies and getting rid of the others that weren’t performing up to expectations rather than seeking out new up-and-coming companies.

“They’re starting to emerge from that process now,” Barber says. “We’ll see some of these firms starting to make new investments, and it’s going to continue to get better. I think that as we get into the spring we’re going to see a lot of new investments. There’s money out there, even though not all of the local funds have readily available cash — many are currently in a fund-raising cycle — but there is plenty of money out there in venture fund coffers around the country.”

Around the state in 2002, Intersouth Partners of Durham expects to fund 10 new investments, the Tri-State Investment Group of Chapel Hill plans on making five new investments, and RBC Ventura Capital predicts it will make five new investments as well, just to name a few.

Where have all the good times gone?

Throughout the late 1990s venture capital firms poured money into thousands of dot-com and telecom startups, ballooning the high-tech bubble until it finally burst. There were hundreds, if not thousands, of deals made where the time that elapsed from a startup’s first meeting with potential investors until the fund managers cut a check was sometimes as little as four weeks, Barber says.

“The due diligence process was turned on its ear by people whose eyes were too big for their plates,” Barber says. “And because of that approach we also saw a lot of what was on those plates slide off.”

According to statistics compiled by Venture Economics and the National Venture Capital Association, VC firms spread $1.8 billion over 118 deals with North Carolina companies in 2000. Through third quarter 2001, the most recent data available, 66 investments poured just $538 million into Tar Heel firms.

Fourth-quarter figures will be disclosed Wednesday at a breakfast event hosted by PricewaterhouseCoopers. The news isn’t expected to be good.

This quarter is off to a reasonably good start, however, with several deals having been announced. Although most have been re-investments in existing companies, at least money is flowing.

Looking at some of the high-profile busts around the Triangle in 2001, it’s easy to understand why investment fever has, at least temporarily, subsided.

BuildNet received the most attention of any sinking company. BuildNet, which was attempting to become the leading online retailer for homebuilders and their suppliers, was financed with $140 million from GE Capital, BancBoston and SG Capital. It filed for Chapter 11 bankruptcy protection last August after attempting to expand too faster than its balance sheet.

KOZ, which sold software and built and maintained Web sites for media companies across the U.S., filed its Chapter 11 papers in April after raising $37 million from Southeast Interactive Technology Funds of Durham, Tribune Ventures and BancBoston among other firms. KOZ was owned by Frank Daniels III whose family owned the News & Observer until 1995. But at least some KOZ assets were absorbed along with other companies to form the new MediaSpan.

And Plurimus, an Internet data services concern that had aspirations of becoming the Web’s version of Nielson Media Research, closed its doors Christmas Day after raising $36 million.

It was a long list of failed investments like these that contributed to many managing fund partners grabbing onto their seats and white-knuckling it through the high-tech shakeout.

Now the time to strike?

Observers are confident that venture capital firms will slowly bring the economy back to life this year, simply because conventional wisdom dictates that a struggling market is the time to begin making new investments, and investments in new companies in turn will spur the economy. But entrepreneurs looking for VC dollars are going to need more than a promising idea to get funded.

“One thing we saw pre Internet bubble was firms throwing money at companies before they had really completed due diligence on them,” says Larry Wilson, general partner for Columbia, S.C.-based Trelys, which plans to invest half of its $40 million fund in North Carolina companies. “But in today’s climate companies are going to have to show that they have a strong management team in place and that they’re already generating revenues at least.”

Ed McCarthy, principal for River City Capital Funds Raleigh office, says now is the time for venture capital firms to roll up their sleeves and use the best of their knowledge and experience to help promising upstarts develop to the best of their abilities.
“I know everyone says that, but I think that in today’s climate it is especially important and true.”