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RESEARCH TRIANGLE–The Council for Entrepreneurial Development’s annual venture investment report for 2003 paints a picture of a “down year,” admits Aurora Fund partner Jeff Clark.

This year, however, he says he’s confident the Aurora Funds will do at least six more new deals. “Wi-Fi is a done ($6.8 million) deal. Two others are close and we’re interested in three or four beyond that. We’ll also do several follow-ons.”

Clark says one of the major differences this year from 2003 is that some liquidity has returned to the markets. “There are some IPOs, mergers and acquisitions. Money is flowing back to limited partners, so they’re more inclined to re-up in funds or in specific deals.”

Clark also says “there’s a significant appetite for making investments by institutional investors.”

The positive uptick actually started in the fourth quarter last year according to a report published Wednesday by Thomson Venture Economics and the National Venture Capital Association.

It said one-year returns on venture capital investments were positive for the first time in three years in the fourth quarter of 2003. “There is reason to think that continued increases are sustainable especially if the IPO and M&A exit markets continue to improve this year,” said Jesse Reyes, vice president at Thomson Venture Economics.

Aurora Funds has a broad portfolio of IT and life science companies that includes Merix, Norak, Trivirix, and StrikeIron.

But both Clark and the Wakefield Group’s Steve Nelson, who runs the Charlotte-based fund’s RTP office, say that unlike the boom years, VCs are looking for quality companies and not rushing to judgement.

No napkin deals

No more business plans sketched out on napkins, Nelson says. “This year is definitely more positive,” says Nelson. “A lot of people are working hard to do deals. But it’s a long road relative to due diligence –no one is jumping to conclusions in advance of doing the work.”

During the “Go-go years” before the bubble burst, says Nelson, “Every investment you made went up, so people thought, ‘why do the work?’ That’s clearly not the case now. We’re looking for the best companies on a risk-adjusted basis.”

Nelson says every investor he knows is chasing opportunities, but there is something of a collaborative nature to it regionally. “A lot of us are talking and say, have you seen this? Want to share some notes?”

When several funds invest in a company, “You share the potential risk and the potential reward. It’s not a bad strategy.” It’s helpful if a company runs out of funds “and you’re not the only one putting in more money,” says Nelson.

But more than that, it allows VCS to “share the work,” Nelson points out. “Not being the only investor trying to make it a successful company, hiring people, looking for business development opportunities, partner opportunities. Having other smart people doing the same thing really helps.”

So what’s hot?

Nelson and Clark agree that VCs these days are only looking at what they call “quality companies.” By that, they say, they mean startups with solid, experience management teams, IT products with marquee customers actually paying cash, and life science companies in or near human clinical trials.

“On the IT side, we want to see some demonstrated interest in the product in the market,” says Clark. “Real living, breathing, paying customers — with an emphasis on paying. Funny how that’s when you can tell a buyer is really committed.”

Clark says it’s especially important for IT companies to find larger, well known clients for their wares. It is impressive, he says, when a larger company that has many choices among established vendors buys a startup’s application.

Nelson agrees. He says the question he asks a software startup is “can I talk to your first three customers? They’re the ones who will validate it. Trophy reference customers are particularly important, a brand name company.”

Clark and Nelson both note that they seek companies with experienced management teams.

Success predictor

“The only known predictor of future success is past success,” says Clark. “Clearly, you want to invest in people who have been successful before.” Even better, he says, is investing “in people you’ve been successful with before. Those are our favorite deals. Everybody understand the other party’s strengths and weaknesses and what holes need to be filled.”

Aurora portfolio company StrikeIron is an example, Clark says. “We worked with the founders on two other companies. When they were ready to do the next deal they approached us and we enthusiastically said yes,” he says.

On the biotech side, Clark’s specialty, later stage deals are still first in line for VC money. “We look for deals within a year or so of human clinical trials,” he says, and even later stage deals for companies with products in Phase I or II trials are also hot.

“Early deals or platform deals years away from the clinic are having a difficult time finding financing,” says Clark. “There’s too much capital still to raise and many companies can’t answer when you ask where the rest of the money will come from.”

New model needed

Clark says he agrees with some local leaders such as serial entrepreneur Max Wallace, who says early stage biotech companies need new funding models.

“Several models for life science startups, such as developing their technology further within university walls, are a valid approach. The technology is developed largely with government grants. Or they set up little corporations within the university so they can get Small Business Innovative Research funding.”

Wallace has also suggested that pursuing backing from non-profit foundations may be a way for some biotechs to raise seed money. Regionally, the Biotech Center is lobbying for more state funds to invest in very early stage research at universities.

Both Clark and Nelson say security and network stability software applications remain hot. Nelson adds that he sees interest in software products for healthcare. He notes, “business services such as business process outsourcing is hot.”

That’s when a company offers out-sourced services in a functional area such as finance or human resources.

All in all, Nelson says this year feels much different than 2003.

“I sense a spirit, faith and optimism,” he says.

Marathon CEDers

You have to stay in shape to keep up with entrepreneurs.

Tracy Harris, CED’s vice president for business development recently completed the Boston Marathon and its hills in 85-degree heat in an admirable time of 4 hours, five minutes and one second.

The folks at the CED’s RTP headquarters kept running tabs on Tracy’s progress via email during the Boston run.

She follows on the heels — so to speak — of Robert Albright, who handles the CED’s PR and recently ran the Paris, France marathon in good time.

Former CED VP Dan Allred is also a runner.

The Wakefield Group


The Aurora Funds