VideoBiowave Corp. seemed primed for its first venture-capital infusion a year ago. At the September 2002 annual summit meeting of Connecticut Venture Group, the Norwalk-based start-up had beat out 49 other companies to win the honor of "best-in-class early-stage venture company." Its plan: develop a noninvasive device to block pain by transmitting high-frequency electronic signals into deep tissue.
But winning actual venture dollars was harder. So far, the four-year-old company has had to make do with around $2.5 million from two preferred angel-funding rounds. CEO Brad Siff admits Biowave has redesigned its business strategy, in part to appeal to VC investors; it is now marketing its tabletop device to physicians instead of physical therapists. Still, Siff's attempts to raise venture capital in early 2003 were unsuccessful, forcing him to raise the second round among smaller angel investors.
At the top of Siff's wish list for 2004: "a horse race where we have several term sheets to choose from." Those offers from VC firms, he hopes, will lead to the initial VC round of $6 million to $8 million Biowave needs to move its device through government approvals to a rousing launch in the marketplace.
Biowave, of course, is far from the only candidate for venture capital to be seeking venture backers—preferably ones with that mystical blend of deep pockets, business acumen, and hands-off support of existing management that entrepreneurs dream of. In a private-equity market that experts generously describe as static, VC firms are parceling out a sparse $4 billion per quarter from what PricewaterhouseCoopers calls the "money tree." In the process, venture firms have kept another $70 billion on the sidelines, earmarked for investment but not allocated. It is "dry powder," in the terminology of an industry that clearly has an ear for metaphor.
"What we have seen in the last five quarters is a legitimate attempt at stability, and a dramatic stop in the decline [in investment]," says Kirk Walden, PwC's national director of VC research. Since the 2000 peak, "investment had been falling steadily, seeking its own natural level." Because upturns in VC investment tend to lag stock-market surges by at least a year—and require decent initial-public-offering or acquisition markets—experts are watching 2004 for signs of life in those areas.
Meanwhile, for now the quarterly investment level "is the right place for the VC industry to be," says John Taylor, vice president of research for the National Venture Capital Association (NVCA). "One of the things keeping investment at that level is the ability of the industry to absorb and manage those [entrepreneurial] companies." He explains, "There are only so many board seats that a venture capitalist can take on at any one time. I don't know whether that number is six or eight or whatever, but it is very much a factor." At the peak, money flooded into VC firms—more than $100 billion in 2000 alone—much of it for Internet start-ups, and much of it "into the hands of people who didn't have the experience to manage well," says Taylor. "I hope we never see that again."
Eye for Management
Of course, that $4 billion per quarter is going somewhere. Currently, life sciences accounts for nearly a third of total investment, up from an historical level of 10 percent. (Under that heading, biotechnology grew steadily last year, while the medical-devices area held its own.) Information technology—still the largest target for venture capital—has shrunk to 60 percent of total investment, from 70 percent in the Internet's heyday. Across all categories, though, VC firms have been looking for solid management experience at the start-ups, and some semblance of finance discipline.
Management skill is one reason that IT consultancy Form + Function Consulting Inc. broke through to its first VC infusion late in 2001. By developing a business plan tied to immediate needs, IT-marketing veteran Bob Bernard was able to convince VC firm Wheatley Partners that year to sign on for 27 percent of Form + Function, while a second VC firm, Topspin Partners, took about 20 percent. Total financing: about $8.5 million.
"We were very fortunate because of the model we were bringing to the market, and the experience of our management team," says Bernard. By then, things were very different from the "more-opportunistic VC market" of the 1990s, when start-ups got money when they lacked management "but seemed to have a good concept."
With a second $6 million round in 2003, Form + Function was able to acquire divine/Whittman-Hart Inc., a consulting firm whose core Bernard had founded in 1984 and run successfully for years—before an ill-timed merger led it into serious financial trouble in 2001. (The new company is called Whittmanhart.)
According to Paul Wimer, managing director of Roslyn Heights, New York based Topspin, Form + Function stood out because of Bernard's previous ability to start and grow a substantial consulting firm. Bernard's company offered measured ROI, and a customer guarantee, as part of its formula. "This was a space we knew well, and a person we trusted," says Wimer, who himself worked previously at Andersen Consulting.
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