Venture Capital Firms: East Coast vs. West Coast
Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts
McCarter & English LLP
2002-08-02
The initial temptation to the impecunious entrepreneur is to circulate a business plan and funding proposal to all the neighboring firms listed in Pratt's Guide to Venture Capital Sources. However, that exercise is almost always futile. The so-called over-the-transom submissions are rarely if ever favored by professional managers, the hit rate being in the neighborhood of one in a thousand. The VCs either initiate their own projects, often finding a talented entrepreneur who has succeeded in bringing a start-up to fruition and backing him on whatever project he selects, or accepting specific recommendations from, say, a member of the VC's scientific advisory board. Moreover, recent research discloses that much of the professionally managed "venture capital" is actually so-called mezzanine capital, meaning it is available only to those firms which have achieved at least adolescence, often defined as cash-flow break-even. On occasion, VCs will pop up at a specific event, say, one sponsored by a prominent investment bank, and look over the menu of the companies presenting; but it is difficult for an otherwise unconnected entrepreneur to make the venture-capital community come to them at the seed and founder's round stage. Usually, one or more rounds of angel investing are required so that the product and business has progressed to the point where a first professional or venture round is in order. At that stage, which usually implies not only proof of concept but significant cash flows and perhaps even cash-flow, break-even, the word is out among the cognoscenti that the VCs are wont to come to the entrepreneur rather than vice versa.
On the other hand, if professional investors can be rounded up, their very presence in the deal can be beneficial. Thus, the intelligent founder will select (and sell his hardest to) those investors who are likely to add something to the offering other than, and in addition to, cash. Some investors have such prestige in the venture world that their election to invest in the first instance will attract additional capital, both in the round in which they participate and in later rounds. It is a wise issuer who carefully selects his partners/that is, investors from the pools such as Greylock, Bessemer, J. H. Whitney, Venrock, Sutter Hill, Mayfield, Brentwood, Kleiner Perkins. They and others are examples of venture funds with such reputations for sagacity that their existence in the buying group enhances the success of the offering. As any veteran of venture capital financing can testify, the first question asked by a potential investor is–"who else is in?"
True startup money is hard to find. To cite an example: A group of asset managers broke out of Alex Brown, one of the leading investment banks in the venture-capital business, to raise a fund for early-stage investment. They elected to locate the fund in Boston since the early-stage investment business started in Boston. The fact is, however, that many of the venerable Boston firms which cut their teeth on some of the most celebrated venture-capital enterprises (Wang Laboratories, Digital Equipment, Prime, Data General) have exited the early-stage business and are exclusively confining themselves to more conservative, later-stage investments; hence, the idea of domiciling an early-stage fund in the cradle of later stage funds.
As a result, Silicon Valley is the clear leader in terms of capital under management and in number of deals per year, for venture capital.
As one would expect Silicon Valley leads the way in each stage of development. For example, according to the PWC Moneytree Report—in one recent quarter for VC—the Expansion Stage there were: (i) 17 total deals in the NY Metro area totaling approximately $245mm deployed; (ii) 27 total deals in the LA/Orange County area with $241mm deployed; (iii) 30 total deals in New England with $316mm deployed; and (iv) 76 total deals in Silicon Valley with $735mm deployed.
Thus, Silicon Valley had two-thirds more activity than the New York Metro area and almost 50% more than New England.
The same numbers hold true for the early stage investments phase (although, when tracking institutional investment in the seed stage one must take into consideration that many of the seed deals are financed by private individuals [a/k/a "Angels"]. During the early stage investment phase, NY Metro finished (a distant) second with $168mm deployed for 25 total deals with Silicon Valley deploying $494mm for 93 total deals.
Before drawing a conclusion too quickly let's take a look at historical data. Since we are concentrating on the first two stages of development, let's take a snap shot of historical data (again relying on the MoneyTree survey) for the "seed stage" round of NY Metro, New England and Silicon Valley from the year 1995 to 2006. Silicon Valley led the way with a total of $5.22BN followed by New England with a total of $1.77 BN and lastly NY Metro with $1.52BN. That's about a two to one ratio for dollars deployed between Silicon Valley and New England/NY Metro.
So what the closer analysis uncovers is the simple truth that Silicon Valley attracts more early stage companies. It would seem to reason that investors in Silicon Valley are willing to take more of a risk on pre-revenue companies because so many more early stage companies are located there; hence more opportunity to invest (or is that the same thing?).
Early stage companies are the life blood of any venture ecosystem—which said ecosystem attracts entrepreneurs to create early state companies which in turn attract more investors, who in turn attract more service providers, which create more early stage deal flow, creating more turnover in early stage companies which in turn creates more unemployed entrepreneurs who in turn create more companies. This venture ecosystem seems to have found a symbiotic developmental cycle in Silicon Valley—why has it not thrived in other areas?
1–The history of innovation behind Silicon Valley—Hewlett Packard, Intel, Apple, enough said.
2–The network effect (giants Cisco, 3Com, Bay Networks, etc. are located in the area)—in other words, with so many entrepreneurs and venture folk in one area it creates a giant network of folks who in fact "network".
3–The "buzz" factor. Clearly, there is more buzz in Silicon Valley than there is anywhere else. The fact is that when you think of an investment bank you generally think of New York City, when you think of start up companies you think of Silicon Valley.
4–Money, see the charts above. The sheer volume of deals creates a cyclonic effect which affects both investors and issuers.
5–Successful operators who have "cashed-out" often seed former colleagues and other "in-industry" entrepreneurs.
A comprehensive list of Venture Capitalists from the National Venture Capital Association (NVCA) can be located at http://www.nvca.org/index.php?option=com_mtree&Itemid=173.
Below is a partial list of Early Stage Funds currently in operation.
ARCH Venture Partners
Currently has seven funds totaling $1.5 billion and supports companies within life sciences, IT, and physical sciences through seed and early stage funding. The firm originated in the Midwest region, but has expanded to provide backing to companies on a nationwide basis with offices in Illinois, Texas, Washington, and California.
Asset Management Company
Was created in 1965 in California as a Palo Alto venture capital firm focusing on information sciences, life sciences, and health sciences technology businesses. It has since then aided more than 250 start ups through diverse stages of company development from early stage through growth equity. Asset Management Company typically enters businesses during the early or seed stage rounds, investing anywhere from $500,000 to $2 million.
Bay Partners
Is a California venture capital firm aiding early stage and growing businesses in the IT and healthcare sectors. It currently has $1 billion in capital under management and has aided more than 300 startup ventures since 1976. It has backed businesses, such as Like.com and Jambool, which have been acquired by Google.
Benchmark Capital–http://www.benchmark.com/
Investment strategy: Be the first venture investor in technology companies that seek to create new markets.
The BioScience Ventures Group–http://www.bsvg.com/
Provides seed money and equity financing, coaching and managerial experience to German biotech, drug and genomics companies.
BlueRun Ventures
Specializes in early stage investments and currently has $1 billion in capital in management. Since its formation 10 years ago, it has invested in technology-based businesses across the world including PayPal and Pogo.com. It normally capitalizes on prospects in the Internet, media, mobile, enterprise software, semiconductor, and components areas.
Bonaventure Capital, LLC–http://www.bonaventurecapital.net/
Manages and invests in developing businesses.
Cap Resources–http://www.cap-res.com/
Houston based services include business plan review, market research, financial forecasts, management consulting, strategic partnering and optimal positioning for venture capital and angel investors.
Cedar Fund–http://www.cedarfund.com/
Focus: Venture capital firm, focusing on early stage opportunities within the telecommunications, Internet and IT software and hardware industries.
Clearstone Venture Partners
Focus: Venture capital firm providing early stage financing to leading edge technology companies.
Catamount Ventures, L.P.–http://www.catamountventures.com
An established VC firm making seed stage investments ($500k - $2M) in the technology sector
Cloyses Partners–http://www.cloyses.com/
Denver, Colo., firm specializing in managing and consulting in capital formation.
EDF Ventures
Backs early stage healthcare and IT companies, and has funded over 50 companies since its start in Ann Arbor, Michigan. EDF prefers companies entering new or under-penetrated markets and represents a true presence within the many Great Lakes venture capital firms.
The Entree Network–http://www.entreeltd.com/
Focus: Angel investor network of retired and active Fortune 500 executives providing relationships, contacts, networking and access.
Evercore–http://www.evercoreventures.com/
Focus: An early stage venture fund based in Santa Monica, California. Features a description of services and current portfolio
Foursome Investments Limited
London-based venture capital firm provides capital up to £0.5m to social-responsibility start-ups.
HAP
UK-based firm provides first or early round venture financing and business plan consulting to manufacturing entrepreneurs.
Hummer Winblad Venture Partners–http://www.humwin.com/
Investment focus: Software companies at every stage of development (startup to mezzanine) that have the basis of becoming a large market leader based on a substantial market opportunity and technical advantage.
Interact Management Inc.–http://www.interactmanagement.com/
Focus: Offers early-stage funding and management guidance. Features list of partners.
Island Connections–http://www.islandconnections.com/
Focus: Secures seed and first round funding for quality ventures in the early stages of development.
KB Partners–http://www.kbpartners.com/
Investment focus: Startup and early-stage companies
Lucid Ventures–http://www.lucidventures.com/
Focus: Provides guidance and locates funding for emerging technology startups.
Matrix Partners
Invests in startups across diverse industries, providing early/late stage and follow-on funding ranging from $2 million to $10 million. With $1 billion in total capital, the company finances entrepreneurs in the United States, India, and China. Over the past 30 years, it has backed companies such as Apple Computer, SanDisk, and TheLadders.com.
Mediaplicity, Inc.–http://www.mediaplicity.com/
Focus:Creates, structures, and deploys seed companies using proprietary operational and strategic techniques and devices.
MedSciences Capital–http://www.medsciencescapital.com/
Focus: independent venture capital fund that exclusively invests in early stage human life sciences companies.
Navigator Technology Ventures
Provides venture funding, management expertise, business plan development and more for technology start-ups.
New Enterprise Associates
Is a multi-stage venture capital firm supporting companies in diverse phases from seed stage to growth equity, and has funded more than 650 organizations worldwide. The company has more than $11 billion in invested capital with companies in the IT, healthcare, and energy technology industries with an open portfolio of 265+ growing businesses.
Next Venture Partners–http://www.nextventurepartners.com/
Finance, consulting, and venture capital firm focused on small companies and startups. Services and contact information.
Pareto Partners–http://www.pareto-partners.com/
Focus: Invests in seed and early stage companies that offer a product or service on the Internet
Sequoia Capital
Is a venture capital firm with presence in the United States, China, Israel, and India. Focus: Backs companies in the seed, early, and growth stages with investments ranging from $100,000 to $100 million. Sequoia Capital is considered one of the top Menlo Park, CA venture capital firms offering west coast funding, partnering with entrepreneurs in the financial services, healthcare, Internet, mobile, and technology sectors. It has backed large players such PayPal, LinkedIn, Google, Yahoo!, and Cisco, and YouTube since its launch in 1972.
Solstice Capital–http://www.solcap.com/
Focus: Focuses on seed- and early-stage companies in alternative energy, education, the environment, life sciences and information technology.
Spangler Ventures
Focus: Early stage venture capital focused on Internet infrastructure, wireless applications, and post-Web Internet.
Stage One Partners
Focus: works with senior management teams at early-stage technology companies to accelerate their growth.
Synogen Development Group–http://www.synogen.com/
Focus: start-up capital to its biotech and med-tech client companies as well as regulatory, IP, business plans and other assistance.
Venture Factory capital–http://www.venturefactory.com/
Focus: Offers executive team selection, guidance, and funding for early stage companies.
Vinci Innovation–http://www.vinci-innovation.com/
Investment focus: start-ups and very young companies in lines of business related to Vinci Group's companies.
Virtual Incubation Corporation–http://www.virtual-incubation.com/
Provides seed capital for early stage technology start-ups.
Woodside Fund–http://www.woodsidefund.com/
Startup and early-stage venture capital firm focusing on but not limited to: Software, Internet, telecommunications and fabless semiconductor companies. Companies need potential to earn revenues of $50 million in 3 to 5 years.
A comprehensive list of Venture Capitalists from the National Venture Capital Association (NVCA) can be located at http://www.nvca.org/index.php?option=com_mtree&Itemid=173.