Here, There and Everywhere
Companies looking for venture capital are increasingly having to shift their focus outside of the Metroplex
By Senior Writer Jeff Bounds
Dallas Business Journal
9-29-2003

If you're looking for a venture-capital firm with a local presence to invest in your company, you're in a good-news, bad-news situation.

On the one hand, it's getting tougher to find local investors because their numbers are shrinking. As more venture firms either close shop or shift their focus away from the early-stage fare that was so popular in the 1990s, a few local mainstays are accounting for more of the dollars deployed here.

It's a trend that's likely to continue, as some of the firms launched in the late '90s will likely struggle to raise new funds.

Here's the good news: As the listings in the following pages show, there are still dozens of local equity investors, with interests ranging from technology to restaurants and everything in between.

Data from Ernst & Young and VentureOne, which track VC investments, shows how a few local firms are emerging as the top sources of capital for Metroplex businesses.
Last year, 103 VCs from across the country together made 154 investments in local businesses -- there is some overlap, as VCs typically co-invest in deals.

But only 21 area VCs made two or more investments locally in 2002 and, through the second quarter of 2003, only six were involved in two or more transactions here.

So if you're looking for capital, odds are you'll wind up talking to Austin Ventures and Sevin Rosen Funds, the most prolific local investors in the past 18 months with 13 and 12 investments in Metroplex companies, respectively.

And you'll probably visit with the multitude of smaller firms that share space at AV's Richardson location and on the 16th floor of Two Galleria Tower, where Sevin Rosen is based.

"The numbers speak for themselves," says Mark Sinclair, Southwest-area practice leader for emerging-growth markets at E&Y.

But the odds are that, if you're raising money, you'll have to get on a plane at some point. Ray Gary, president of Dallas-based Koch Ventures L.L.C., says 80% of money invested in local firms comes from out of state.

Koch wants to be a player in the Metroplex and has the capital to do it. Funded primarily by its corporate parent, Wichita, Kan.-based industrial conglomerate Koch Industries, Koch Ventures moved here from Arizona last year, and is quietly seeding several local start-ups and planning to put in larger amounts if it believes they have potential.

Like AV and Sevin Rosen, Koch Ventures invests primarily in technology. It has four areas of interest -- enterprise software, communications, bioinformatics and nanotechnology -- though Gary says the Metroplex's communications base has the most promise for Koch.

Koch is interested in software for improving broadband and wireless infrastructure -- which is central to the Telecom Corridor -- and in nanotech work at the University of Texas at Dallas, though Gary says Koch hasn't yet found a suitable investment in that field.

Certainly, Koch's interest in communications fits the area. Information-technology companies received 84%, or $417.2 million, of venture capital invested in the Metroplex last year. That percentage grew to 89% during the first two quarters of 2003.

VCs are increasingly interested in software, since it needs less capital to develop to the point where a company can be sold or go public.

But VCs, as a group, are pulling back from communications and focusing on health care. Few local health care firms, however, have landed funding, a big part of why the local venture market has recovered more slowly than the nation at large.

Sinclair says venture investors are concerned about the lack of infrastructure in the Metroplex for growing a successful health care company, such as seasoned executives successful in areas like biotechnology.

However, while the Metroplex's health care and life-sciences industries may never equal those of San Diego, more VCs with expertise in those fields are taking an interest in this area.

Koch, for one, will likely put money into local companies in the field of bioinformatics, the creation of information systems used in areas like genomic research, forensics and pharmaceutical development.

Koch has forged an informal partnership with Baylor College of Medicine to build companies around bioinformatics products developed there and wants to make similar partnerships with the University of Texas Southwestern Medical Center at Dallas and other research institutions around the state.

Meanwhile, an incubator aimed at medical-device start-ups, the North Texas Enterprise Center for Medical Technology, recently opened in Frisco and is beginning to work with young companies.

And Oklahoma City-based Chisholm Private Capital Partners opened a Dallas office in early 2003. Among other things, Chisholm runs a fund that makes seed investments in life-sciences companies in Oklahoma and will be prowling for health care deals in the Metroplex.

"I believe the Dallas health care opportunity is enormous and untapped," said William Paiva, a general partner at Chisholm. Most Dallas venture firms interested in the field want to use information technology to improve health care and delivery, he added.

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