Capital Without the Venture

In today's static venture-capital markets, only the safest early-stage firms get the money.

Biowave 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.”

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