CARY — The more often I attend the quarterly breakfast briefings about trends in venture capital financing put on by PricewaterhouseCoopers, the more I am puzzled as to why entrepreneurs don’t take advantage of the opportunity and show up.
For all the complaining executives involved with startups grind out about the difficulty in finding money, few seem to tackle the PwC “Shaking the MoneyTree” event. A nice-sized crowd turned out for the latest session on Wednesday in Cary, but if you are one of the tech executives seeking cash who decided to pass on attending so you could catch some more sleep or head to the office early then muzzle the gripes about not being able to get “face time” with the VCs.
PwC made Arthur Klausner of A.M. Pappas, a new member of the RTP tech community, and Richard Tadler of TA Associates available as panelists. Plus, in the crowd were representatives of — at least – Intersouth Partners, The Aurora Funds, Southern Capitol Ventures. Some angel investors were also spotted.
If nothing else, Tadler and Klausner offered insightful advice for life science firms seeking funding. Both know the business and represent firms looking to make deals. Tadler is head of TA Associates’ Healthcare Group. TA, which operates offices in Silicon Valley, Boston and London, has $6 billion under management. Klausner joined Pappas, with $200 million under management and is raising $150 million more, in April after spending 15 years at Domain Associates.
For example, PWC moderator Laura Hoke asked the two what they were looking for in terms of potential investments.
“Have some form of unfair advantage,” Tadler said. “If you can’t discuss that, you ought to rethink what you are doing.”
He went on to add two other crucial points:
“How much does the entrepreneur know about the competition? One of the best hires a company can make, even if it’s a summer hire, is to do intense, strong research in your space. So many executives are glib about the competition.
“Have one or two pages that you can look at weekly, monthly and quarterly that tells you where you are as a company. It is something you can show the board and investors. It should be the same metrics used by your managers.
“It’s different for every company,” he added. “But they are important in understanding how you look at your business. I’d rather see that than 100 PowerPoint slides and information about the size of your space.”
Klausner added that executives need to know the “important drivers” for their business and a thorough examination of funding strategy based on requirements in the life science space. (For further insight on that subject, see today’s LTW Entrepreneurial Spirit column).
First-quarter funding for deals nationally dipped to $4.6 billion from $5.4 billion in the last quarter of 2004, with deals in the Southeast dropping 38 percent to $261 million. But the picture was not entirely glum.
art.com closed on $30 million shortly before being sold to AllPosters.com. LVL7 raised $14.8 million, Integrian $13 million and Hatteras Networks nearly $11 million. And just last week Tranzyme Pharma closed on $26 million.
Despite a lack of software and biotech funding in the first quarter, Klausner cautioned the crowd to “take a deep breath — It’s difficult to conclude what’s going on.” Talking about healthcare finance trends, he stressed, “I’m not going to conclude that we’re going into a downturn. Let’s wait another quarter or two to see if there is a sea change.”
Overall, Klausner said he seeks the market as a “glass half full rather than a glass half empty.”
The initial public offering route might be producing more “exits” and thus getting more VCs excited about making deals if it weren’t for Sarbanes-Oxley regulation, Tadler added. Venture-backed companies going public in the first quarter dipped to 10 after consecutive quarters of 13, 29, 24 and 27 in 2004.
“SarbOx is definitely having an impact,” Tadler said. “CEOs and CFOs are having to sign things they didn’t have to before, and they are nervous.”
The increased oversight is also driving up costs, Klausner pointed out. “We’re looking at $1- to $2-million a year in expenses, not to mention the time and distractions,” he said.
With IPOs looking more formidable and costly, Tadler said the merger and acquisition exit market is “enormous.”
In the Triangle just this week, financially strapped PharmaNetics decided to revert to private status to escape some of the costs of being public.
While investing dropped off to start the year, there has been little slowdown in VC fund raising. In fact, Tadler said some funds have people “begging their way in” and closings are taking place within 30 days.
VCs raised $5.3 billion in the first quarter, down from $6.2 billion the previous quarter, but Tadler described recent fund-raising activities as “wild”.
Klausner noted that Pappas is “targeting $150 million” for its own new fund and “had a nice close at the end of the year”.
However, each conceded that the market is a “difficult environment” for startups.
“Long term, the prospects are good,” Tadler stressed. But he also said art.com’s close after years of building a successful company was a good model to follow. “There’s something to be said about not taking $10 million in venture funding for a startup.”
Rick Smith is managing editor of Local Tech Wire.