Venture Firms Are Looking For The Exits | With the IPO market still weak, VC investment is hard to come by
Mark Terrell, founder of SepSensor Inc. in Marlborough, pretty much gave up on looking for venture capital investment in 2009 after about a year and a half of searching and making pitches.
“The market was dead, there was no use in looking,” said Terrell, whose company has already benefitted from millions in angel investments — a smaller-cap form of venture investments.
But to take his company to the next level will require a larger investment from a VC firm.
No Way Out
Terrell’s business installs sensors in holding tanks for restaurants alerting them when the tanks need to be emptied. That saves restaurants money from unnecessarily pumping the tanks and it prevents them from a possible multi-million dollar accident. He already has six employees and clients in nine states.
Terrell said he could grow nationally and add up to 100 employees within a few years if he receives a venture boost.
But venture capitalists slowed their investments in 2009 to their lowest levels since 2003. The market experienced a 30 percent drop nationally, according to statistics from Dow Jones Venture Source.
Matt Harris, managing general partner of Village Ventures, which has offices in Williamstown and Manhattan and manages $175 million in assets, said venture deals were down because exit strategies in the market dried up.
Venture firms invest money in companies, help the companies grow, then execute an initial public offering or a merger and acquisition to gain a return on their investment.
But the IPO and M&A markets slowed dramatically during the economic downturn, causing venture firms to tighten investments going out the door.
“What’s important to venture capitalists is a level of predictability,” Harris said. “We’ll invest in a down economy. It doesn’t matter if things are bad. What’s really scary is when there’s no way to get out.”
The slowdown in venture deals created some ripple effects across the entire investment market.
Chris Golden is chairman of Boynton Angels, a Westborough-based angel investment firm.
He’s noticed that more deals nowadays are hybrids where companies are combining venture and angel sources together to get the biggest investments they can. Traditionally venture firms and angels would not be interested in the same types of investments because ventures would seek later stage, more developed companies while angels invested in earlier stage companies that were not yet as fully developed.
But in 2009 the two met somewhere in the middle, Golden said.
Will Cowen, a managing partner at Long River Venture in Worcester, said like the national trend, deals slowed down in 2009 but finished the year strong. No deals were completed in the first half of the year, and now the company has done five deals in six months.
“For us, a number of projects we were working on got delayed for one reason or another and they just slipped to the end of the year,” Cowen said
Since then, it’s been busy, and Cowen expects that to continue in 2010.
He said the exit market is still soft, but VC firms are always looking for good bargains.
“People start businesses in all economic times, so I think good teams with reasonably priced deals will still be able to find money,” he said.
Wade Appelman and his two partners at Harvest Automation Inc., which was founded in Groton, were some of the lucky ones in 2009 to get funding.
Appelman is no stranger to venture investments; Harvest is his fifth venture-backed startup. They have since moved their offices to Billerica, but they began on a “bootstrap” campaign. Two former executives from iRobot, which created the robotic vacuum cleaner already on the market, broke off and started Harvest.
The executives searched for input from leading scientists and engineers to create some prototypes in exchange for future equity in the company. It eventually paid off with the company receiving the $4 million in venture funding, primarily from the Massachusetts Technology Development Collaborative.
But Appelman said the slowdown was not just about the IPO and M&A market slowing down. He said venture capitalists are going through their own transitions.
“There’s a lot of shakeup going on in the venture community,” he said. “I think a lot of them were taking 2009 to deal with their own in-house issues of raising their own funds before they were looking to make new deals.”
Despite the national slowdown, the New England region still fared better than most of the country. VentureSource reported that the region’s investments fell by only 20 percent compared to the national drop of 30 percent. Some areas of the New England venture market even grew.
Health care investments made up the largest piece of investments nationally and regionally, VentureSource found. And the increase in health care venture investments in New England between 2008 and 2009 of just under $200 million is almost the same amount that the health care venture market increased nationally.
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