While the Southeast continues to drag through one of the slowest periods for venture investing in years, the region’s leading venture firm has repeatedly pulled the trigger on deals elsewhere.
Intersouth Partners in recent months has participated in the financing of two companies in Maryland and one in Connecticut. That compares to just one North Carolina deal the firm has taken part in this year.
“We have several (deals) in this region that we’re working on, and two or three may close in the next few months,” says Mitch Mumma, one of Intersouth’s three general partners. “Our primary investment focus is on the Triangle and, to a lesser extent, Washington, D.C.”
Having Washington as a secondary target market is how Intersouth became involved with Covega and Artifact Software.
Covega, a Jessup, Md.-based optical components firm created in March through the merger of Quantum Photonics and Codeon, obtained a $17 million round in conjunction with its launch. Intersouth had backed Quantum earlier, Mumma says, and one was one several existing investors in the two predecessors, including New Enterprise Associates, Core Capital Partners and Kinetic Ventures, to reenlist with the combined company.
“This should be plenty of money to get it over the hump,” he says, adding that backers are enthusiastic about the sales prospects for the semiconductor laser diodes, optical amplifiers and high-speed modulators Covega produces even in a depressed telecommunications market.
Pushing beyond D.C.
Intersouth also led a $4.75 million first round for Artifact of Baltimore, which tries to leverage pieces of older software, such as source code or design models, so they can be reused for new applications and systems. Draper Atlantic and Mid-Atlantic Venture Funds also participated in the deal.
Maryland economic development officials tipped off Don Rainey, a venture partner for Intersouth based in suburban Washington, about Artifact, which was founded last year by the same team that had created Sequoia Software and took the company public before selling it for almost $200 million in a down market. Rainey says Intersouth was attracted to the deal because of the executive team and their push into the growing field of “code management.”
“These are smart software guys chasing a huge software problem,” he says. “Seventy percent of new applications are simply rewrites of what has already been developed, and this helps developers organize their code and share components.”
The furthest afield Intersouth has gone in recent months has been to participate in a $26 million first round for Sopherion Therapeutics of New Haven, Conn., which was founded by a former Harvard Medical School researcher and is developing drugs to prevent cancer from spreading from one part of the body to another.
Mumma says the firm became aware of Sopherion when Bob Bell was asked to serve on its board of directors. Bell, another Intersouth venture partner, is a former Glaxo Wellcome executive and director of the Duke Comprehensive Cancer Center.
Although Intersouth officials like the potential for the company’s drug pipeline, Mumma says, the firm primarily took part in the deal because of who else was investing. Sopherion’s round was led by TL Ventures and also included HealthCap KB, ProQuest Investments, Johnson & Johnson Development, Seaflower Ventures, Connecticut Innovations and GE Life Science & Technology Finance.
“We can’t ask people to come here and take part in our deals if we won’t take part in their deals elsewhere,” he says, noting that Intersouth sets aside about 10 percent of its funds for such “outside” investments. “There were a number of firms involved (with Sopherion) that we would like to do business with again.”
Slow times back home
But neither Intersouth nor any of those other venture firms has done much investing in North Carolina lately.
The only area deal Intersouth has taken part in through the first four months of the year was the $9.8 million second round for StemCo Biomedical of Durham, which makes test kits to measure and help isolate a person’s stem cells.
That is one of a paltry 17 deals totaling $105 million that have been completed in the Tar Heel State in 2003, according to Local Tech Wire statistics. The latest MoneyTree Survey by accounting firm PricewaterhouseCoopers, the National Venture Capital Association and research firm Venture Economics shows that venture investing in North Carolina during the first quarter of the year was the lowest since early 1997.
Still, Jeff Barber, who heads the Raleigh office of PricewaterhouseCoopers, says he isn’t concerned by Intersouth’s growing out-of-state activity.
“They are to the point where they can be considered more of a national player and not just a North Carolina venture firm,” Barber says. “I’m sure they will continue to be active in this area when they see good deals.”
None of Intersouth’s latest investments are from its $205 million sixth fund, which closed in February, Mumma says. The firm is trying to commit the final pieces of its three-year-old fifth fund out of fairness to the investors in that fund before touching the new money, he says, although it likely will begin tapping the new money within the next few months.
Intersouth Partners: www.intersouth.com