Amount of VC invested in 2004: Venture One says $20.4 billion, MoneyTree says $20.9 billion
Amount of VC invested in Q4: Venture One $4.5 billion, MoneyTree $5.3 billion
Percentage of VC going to early stage companies in '04: Venture One 17%, MoneyTree 19%
The MoneyTree release pointed out that this is now the 11th straight quarter of venture investing in the $4 to $6 billion range! But I think it is also important to mention as a reminder, that the numbers reported are low for several reasons:
1) Not all VCs report their numbers for a variety of reasons which include protecting their companies from competition. This is where the VC and the management team have agreed to keep things quiet about the recent round and decide to let the company run in stealth mode for a while.
2) The reports do not include investments made by angel investors. So, the numbers reported for early stage companies getting funding are actually higher.
When I said last year that there were going to be some big deals announced shortly in North Carolina, I wasn't kidding.
Constella Group just announced that they raised $61M from Wachovia Capital Partners and Wakefield Group. The infusion also allowed Constella to acquire Futures Group which doubles the company's revenue.
Nice job Don!
Congratulations to Inlet Technologies, Liquidia Technologies, Mardil, Oriel Therapeutics, Respirics, Stonewall Networks and Triad Semiconductor. These 7 companies were added to the list to present at Venture 2005.
The deadline for companies looking to present is 1/31 and more companies will be selected and announced next month.
After we picked these 7 companies at the Venture 2005 Selection Committee meeting yesterday, I headed back to Raleigh from RTP. We probably had about a half of an inch of snow on the ground at that point. I started to hit what I thought was a little bit of traffic. Usually, it is a 30 minute drive. Little did I know that it would take me 5+ hours to get back, the snow would become ice and I would get in a small accident on the way.
The Southeast's largest venture conference, Venture 2005, will be held on April 26-27 in Pinehurst, NC. This is the 22nd year of the conference which showcases some of North Carolina's hottest tech and life science companies to hundreds of VCs from throughout the US. Last year, over 800 people attended.
I am on the selection committee this year and over the next two months, we will be going through a lot of applications and choosing other companies to present. I'll post the results here.
Tonight's panel that I moderated went really well. There were some great questions and the mix of Michael Jones from ChannelAdvisor, Michael Doernberg from DoubleClick (former CEO of SmartPath) and Ted Dintersmith with Charles River Ventures was fantastic.
Here are some general thoughts they shared in response to questions from me and the audience:
- There are a lot of good new ideas out there. What differentiates companies and makes them great is the execution.
- Entrepreneurs shouldn't debate whether or not this is the right time to start a business. That is almost like trying to time the stock market. The advice was to ignore market conditions.
- Also, entrepreneurs shouldn't read about a hot space and try to start a company trying to copy the model. Usually, when it is in print, it's probably too late. At that point, there could be tons of competition.
- Too much time is spent building and carefully refining a business plan for VCs.
- For the market research for start-ups, it was recommended that instead of studying tons of research reports, more entrepreneurs should pick up the phone and talk to potential customers. Call up twenty potential customers, share your idea and see if they would they be willing to be a beta customer. And if the first twenty say no, be peristant and call another twenty.
- VCs are attracted to entrepreneurs with a "spark" and a winning, take no prisioners attitute.
- Some entrepreneurs think they need to raise a ton of capital to sufficiently build their business, but when you look at many of the most successful companies on NASDAQ, many of them have either raised a small amount of capital (under $10 million) or in other cases, they didn't raise money at all.
Tomorrow night I am moderating a CED panel in Research Triangle Park on "The Entrepreneurial Climate - How to Start or Grow Your Company." This will cover things like the timing of starting a business and the best way to position it for success.
I am pretty excited about doing this and recruited some great panelists:
- Michael Jones, COO of ChannelAdvisor. I need to add the disclaimer that ChannelAdvisor is a portfolio company. Michael is incredibly sharp, very aggressive and "gets" business. For those of you that know ChannelAdvisor, you will know that eBay is a co-investor in the company with us.
- Ted Dintersmith, General Partner with Charles River Ventures.
- Michael Doernberg, VP of Enterprise Marketing Solutions, DoubleClick. Like MJ, Michael Doernberg has been known at successfully building multiple businesses and selling them. His last company was SmartPath which he sold to.... DoubleClick.
There should be over 100 people attending with a blend of aspiring entrepreneurs and some seasoned execs. If you are local and can make it, I hope you register and stop by. Please introduce yourself!
If you have any questions that you may want asked to the panelists tomorrow night, email me.
Here are three companies here locally that I think could potentially have breakout years in 2005. I like them all for different reasons. Two of them I found recently and another I re-discovered.
Rural Sourcing - Led by Kathy Brittain White (former CIO of Cardinal Health), the company is getting a lot of attention lately (including CNBC and CIO Magazine). But the buzz being generated about the IT outsourcing company is that instead of companies having to ship jobs to India, they can outsource projects to RSI's employees that live in rural communities right here in the United States. This achieves several things:
1. It helps build up the rural communities with skilled technology jobs.
2. People that grow up in these rural communities and develop these skills from colleges/universities in that market, no longer have to leave home and relocate to find a job.
3. The customer is still able to get a lower price while making sure the quality stays high.
They have opened two locations already (North Carolina and in Arkansas) and with Kathy's passion and network, I think this will be a huge success.
Lulu - I kind of doubted Bob Young (co-founder of Red Hat) when he launched this after combining a few companies that were crumbling, but his strategy is starting to make more sense to me.
Lulu is changing the rules and allowing the owners of IP to be their own publishers. You can use Lulu to list and sell content like books, photos, images, custom calenders and music. You set the royalty you want to receive from each purchase and Lulu gets a cut of every transaction.
Bob seems to have the golden touch. He purchased the Hamilton Tiger Cats in the Canadian Football League after they went 1-17 in 2003. In 2004, they went 9-8-1 and made the playoffs. During the 2004 season, they attracted 250,000 fans for the first time in the team's 135-year history.
Zenph Studios - I was over at John Walker's house recently and his company is focused on turning audio recordings back into live performances - which in turn, can be re-recorded in the highest quality modern surround sound. What he hopes to do is be able to take old music with poor sound quality and re-record it so that the quality is good enough to play on XM Radio as an example. John is one of the co-founders of Ganymede which was acquired back in 2000 by NetIQ.
By the way, if you are over at John's house, ask to see the "fishbowl." He has some really good artwork.
Keep your fingers crossed - 2005 could emerge to be a great year.
From my perspective, competition will heat up even further for later-stage companies that have made significant progress and are now seeking an additional round of financing. This trend will drive up valuations.
Start-ups should attract more attention too, but the venture capitalists will remain incredibly selective. For the most part, the days of funding just an idea are gone.
Also, the IPO and M&A markets should remain open and strong, which will help return capital to limited partners.
I asked several other venture capitalists to join me in making a prediction for 2005. The VCs below are either in the Southeast or invest in Southeast-based companies. Here are six other predictions. I appreciate their contributions.
Overall Venture Market to Continue Its Steady Recovery
"The venture capital market will continue its steady recovery in 2005. Exit markets, which returned in 2004, will continue their positive pace in 2005. The IPO window will remain open for much of the year for high growth companies with critical mass. The M&A market will also sustain its current healthy clip, particularly in software.
While venture firms will remain cautious, the activity level will rise in both numbers of deals and dollars deployed. A few new venture firms will emerge as leaders in the Southeast and Mid-Atlantic region, while a number of existing players will wind down their activities.
Venture returns to limited partners will continue to outpace public market returns over the long term by a significant premium."
-- Tom Roberts, Principal, Harbert Venture Partners, Richmond, Va.
More Favorable Valuations for Entrepreneurs
"Too much money will be chasing too few deals. The venture industry is raising more money than can be profitably deployed. Also, the $100 billion raised by the industry in 2000 needs to be invested by the end of 2005 or sent back to investors. These two things mean better prices for entrepreneurs and lower returns for undisciplined venture capitalists."
-- Mitch Mumma, General Partner, Intersouth Partners, Durham, N.C.
More Competition for Series B and C Rounds
"2005 should bring increased competition for follow-on financings. In the IT sector, we're seeing customer spending increasing, sales cycles decreasing and exit environments improving. In addition, money is flowing into the venture industry - mainly into funds that target companies at the Series B or C stage. A company that can gain some market traction and some meaningful revenue should find a very receptive capital market. We're already seeing this happen with our portfolio companies - the old four to six month time frame to raise a Series B or C round is shortening as companies are achieving real value-adding milestones. This is good news for entrepreneurs, because B and C round investors will need to move quickly and compete to get into the best deals."
-- John Glushik, Intersouth Partners, Durham, N.C.
Early Stage Money Will Start Flowing
"Venture funds typically have life cycles of five to seven years. New funds often put money in early stage companies at the beginning of their fund life cycle hoping for home run, while later in the fund life cycle VCs look for later stage deals to help get faster returns on their investments. The difficulty of raising funds over the last few years and a challenging IPO market has had many venture capital firms focused on getting their existing portfolio companies to exits or investing in later stage companies that have a better chance of success and a more defined exit strategy.
2005 will be an interesting rebound year for venture capital firms and early stage companies. Half of all venture capital firms are currently fund raising. New LPs appear to have an interest in alternative investments and it seems like the funds that have a good track record versus their peers should not have problems raising money. 2004 closed with venture capital firms raising around $18 billion, a 71 percent increase over 2003. In late 2005, the funds flush with cash will be actively seeking to put the money to work and early stage entrepreneurs will once again have several investors looking at them as potential home runs for their new portfolios.
Will it be the boom days again? No, but it will most likely return to the mid 1990's levels of investing...which is a good thing for entrepreneurs who have likened the last few years to the ice age."
-- Rik Vandevenne, Associate, River Cities Capital Funds, Raleigh, N.C.
Capital to Start Gushing Back to Communications Start-Ups
"I'll go out on a limb and suggest that with another year past and a few more exits in the telecom equipment sector, that the pain and suffering caused by the nuclear winter of 2002 and 2003 will fade into distant memory, and early stage money will start gushing back in to fund communications start-ups."
-- Tom Smith, Partner, Mid-Atlantic Venture Funds, Reston, Va.
2005 Becomes Year of the Cell Phone
"My prediction is that 2005 will be the year that cell phones genuinely start to become more and more general-purpose computer/communications platforms (smart phones). More and more business travelers will stop carrying their laptops on business trips and the world of cell phone software applications will begin a long cycle of increasing development."
-- Tom Scholl, Partner, Novak Biddle Venture Partners, Bethesda, Md.