Venture Capital: Investors looking at wider horizons

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Venture Capital: Investors looking at wider horizons

Friday, May 10, 2002

By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER

Three years ago, Seattle venture capitalists could walk out their front doors and trip over a hot investment opportunity. But now, with the technology market in a slump, a few VCs are branching out geographically in search of hidden jewels in far-off places.

Still in the early stages, it is unclear whether the strategy will pay off. But for venture firms that once had their plates full with Seattle start-ups, looking outside the Puget Sound market may lead to unique opportunities at lower valuations without the heavy competition from Silicon Valley or East Coast firms.

Mark Solon, managing partner of Highway 12 Ventures, a 5-month-old Boise, Idaho, firm with $27 million under management, has seen this trend first-hand.

When Solon sent out a recent e-mail to West Coast venture capitalists announcing Highway 12's new Web site, he said the response of VCs wanting to participate in Idaho's high-tech industry was incredible.

"I do think the events of the past 24 months are forcing venture capitalists to look outside their traditional feeding grounds," said Solon, whose firm is backed by Village Ventures, an East Coast firm that recently set up more than a dozen affiliates in unlikely places such as Lexington, Ky., Tucson, Ariz., and Charlottesville, Va. "You still won't get John Doerr on a plane to come to Boise to look at a deal. But you might get Mark Mecham (of Northwest Venture Associates) or Artie Buerk (of Seattle-based Buerk Craig Victor) to do it."

During the boom years -- when investment deals were being negotiated in days rather than months -- getting venture capitalists to travel over the Evergreen Point Floating Bridge was a challenge. But now that deal flow has slowed, VCs are spending more time trying to find fundamental businesses with solid profitability plans, no matter where they are located.

It is not as if money is flowing into the inland Northwest or Canada. Montana and Idaho reported no investment activity in the first quarter, according to the MoneyTree Survey.

But some VCs say there is a desire to look beyond the hot spots of Silicon Valley, Boston, Seattle and Austin, Texas, for new deals. Among the few states that actually saw year-over-year increases in venture capital in the first quarter were Indiana, Louisiana and Nevada. Hardly venture capital hotbeds.

Jeffrey Chambers, managing director at Boston-based TA Associates, a $5 billion private-equity firm, said his company has always looked outside core high-tech markets. It has backed companies in Mitchell, S.D., Eden Prairie, Minn., and Mobile, Ala., to name a few.

"You are more likely to find companies that have not thought about the venture capital model to start a business," said Chambers. "You are more inclined to find traditional entrepreneurs who don't like the idea of losing money."

And that's exactly the type of entrepreneur VCs are trying to tap these days.

Solon of Highway 12 Ventures emphasizes that point when discussing Boise.

"There are many more-traditional businesses with clear paths to profitability that I find in Boise than pie-in-the-sky, silly, shoot-for-the-moon types of businesses," he said.

Highway 12 isn't the only one targeting opportunities in the inland Northwest.

John O'Donnell, executive director of the non-profit TechRanch in Bozeman, Mont., moved to the city a year and half ago to kick-start venture investment and new technology ventures coming out of Montana State University.

Even though Montana doesn't rank in recent venture capital surveys, the former executive at Costco and Onvia.com says venture capitalists are paying more attention to the state.

"The reality of the market today is that the venture firms are having to look harder and further for deals, and that bodes well for us," O'Donnell said. "Some VCs understand that there may be more attractive valuations in the hinterlands."

O'Donnell says TechRanch is working with about eight companies. While it doesn't invest cash, it does provide services such as office space, business and legal advice and access to angel investors. In recent months, O'Donnell said, he has had more success setting up meetings with Seattle VCs.

"Some say it is too far away, it is out of their two-hour limit," he said. "And other guys are saying 'Tell me more.'"

Still, he admits there is a perception issue about Montana that is difficult for some venture capitalists to overcome. There's also the distance factor, though O'Donnell is quick to point out that Horizon Air offers daily non-stop service from Seattle to Bozeman.

Kent Johnson, managing director of Seattle-based Alexander Hutton Venture Partners, said his firm has looked at deals in Idaho and Spokane in the past six months. But beyond Boise, he said difficulties arise in building management teams and attracting talent.

"That's a bigger risk than we are willing to take," Johnson said.

As far as expanding geographically, Johnson said there is not really a need to do so right now.

"Deal flow is not what it was two years ago," he said. "But we are seeing enough to keep our appetite (in Seattle)."

Northwest Venture Associates, with offices in Spokane and Seattle, is spending a little more time cultivating deal flow from Idaho and Montana.

"We are not beating the streets in those areas," said Northwest Venture's Mark Mecham. "But we are fostering relationships with firms like Akers Capital (in Boise) and Highway 12 Ventures."

If Madrona Venture Group looks at an investment opportunity outside the Seattle or Portland markets, partner Greg Gottesman says, it has to get over a "higher bar." The Seattle firm has looked at deals in Canada and Eastern Washington, but it is focusing on the two biggest cities in the Pacific Northwest because, Gottesman said, there is a strong entrepreneurial culture that breeds start-up companies.

That's definitely not the case with Guide Ventures.

The Seattle firm, led by Russ Aldrich and Jim Thornton, recently decided to expand its geographic reach beyond the Pacific Northwest to include San Diego and Arizona. Thornton, who has spent nearly 20 years in the Seattle area holding executive positions at companies such as Aldus and Lifespex, said the local start-up community has stalled.

"We are seeing a lower level of business activity in Seattle. And there are 29 venture capital firms up here ... so the area is overcapitalized," said Thornton.

P-I reporter John Cook can be reached at 206-448-8075 or johncook@seattlepi.com. For more information on Seattle-area start-ups or venture capital firms, visit www.seattlepi.com/venture

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