Money was hard to find in tough '01
From the December 21, 2001 print edition
Lyn Berry-Helmlinger Business Journal Staff Reporter
It was a tough year for cash-strapped entrepreneurs.
Investors still recovering from the sting of their dot-bomb losses became even more wary in 2001 as the public markets continued to deteriorate.
Not a single Colorado company went public this year -- bad news for venture capitalists who depend on initial public offerings to make returns on their investments.
As a result, there was little funding for growth, according to Rick Patch, a partner with Boulder-based Sequel Venture Partners.
"The economy forced traditional business to pull their horns in and buy less, which affected any new growth or new products that might be brought to market," he said. "This forced all the existing portfolio companies to really pull back as well."
In fact, according to this year's quarterly updates from The PricewaterhouseCoopers/VentureOne MoneyTree Survey, venture capital investments declined every quarter in 2001, both locally and nationally.
As of the third quarter of this year, Colorado companies had raised $830 million, according to the survey. In 2000, investments through the third quarter totaled $2 billion in Colorado.
However, the gloomy landscape didn't stop some local companies from beating the bushes and raising a fair amount of capital, as indicated by data in the following quarterly breakdown -- all of which was collected from this year's quarterly MoneyTree surveys.
First quarter: Telecom and software
Fourteen Colorado technology firms raised $373 million in the first quarter of 2001 -- 60 percent less than what was raised during the same period in 2000.
However, Telseon, an Englewood-based telecommunications firm, managed to raise $175 million in this difficult quarter from a handful of investors led by DLJ Global Communications Partners.
According to DLJ chairman Andy Rush, Telseon was a good investment because it has a viable future as a provider of optical networks that help enterprises thrive in the new economy.
"Telseon is attractive because it has clear technology leadership, an aggressive business model and overwhelming support from key Internet backbone providers," he said.
The investment brought the company's total funding up to more than $261 million and secured its position as Colorado's top capital-raiser in 2001. The other significant investment of the quarter went to Denver-based Internet security firm, OneSecure. The company raised $67 million, led by First Union Capital Partners, bringing its total venture backing to $92 million.
"We decided to lead the round because we see OneSecure as the next leading managed security services provider," First Union principal Walker Simmons said at the time of the funding.
Venture capital alone can't make an idea profitable, however. In July, OneSecure announced that it would drop its service operations and focus on the development and sales of its security software.
The company's CEO, Don Detampel, said the company's decision was based on feedback from clients, who said they would rather use the technology in-house as a product, rather than as a service.
Second quarter: Electronics and computer hardware
The greatest funding of the second quarter went to Boulder-based DataPlay Inc., a startup that makes products such as a tiny $10, 500-megabyte storage disk that can record about 11 hours of music.
The digital media company raised $55 million in the worst money-making quarter since 1999.
During this quarter, 24 Colorado companies raised just $289 million. That amount was 75 percent less than what was raised during the same period last year.
Rick Patch of Sequel Venture Partners -- which contributed to the DataPlay investment round with the likes of Intel, Kodak, Olympus and musician David Crosby -- said it was DataPlay's world-class management team and innovative products that made it an attractive investment.
"They're top-drawer in management and they're creating products that the industry is really rallying around," he said. "This company could seriously change the way all of us interact with digital media."
DataPlay's second-quarter investment counts as the state's fourth-largest deal of the year. The company has raised $119 million since its 1998 inception.
Third quarter: biotech
The amount of capital flowing to Colorado companies declined yet again in the third quarter, to $158 million. That total, raised by 15 technology firms, was down 47 percent from the second quarter and a 58 percent decline from the first quarter of 2001.
Westminster-based biotech company, Myogen, secured the most capital in this quarter, raising $52.5 million from investors led by JPMorgan Partners. The company, which develops drugs to combat heart failure and other cardiovascular ailments, earned the fifth-largest Colorado investment of the year.
Myogen's CEO, Bill Freytag, attributes the funding interest to the company's technology, which targets the large and lucrative market of heart patients.
PricewaterhouseCoopers said the investment was the biopharmaceutical industry's third-largest, nationwide, when compared with finance rounds in the first and second quarter.
Fourth quarter and beyond: more biotech?
Although the fourth-quarter MoneyTree survey has not yet been released, it looks as though Boulder-based Pharmion Corp. will garner the largest investment. The pharmaceutical company -- which is working to bring drugs that treat blood disorders to market -- captured $65 million in funding this quarter. The investment, led by London-based Nomura International's Private Equity Group, is Colorado's third-largest in 2001.
Sequel's Patch said biotech and pharmaceutical companies will likely continue to attract investors, despite their risk, in the coming months.
"Something that really works on the human condition is almost always a home run," he said.
Overall, however, Patch said it will be the companies -- in any sector -- with strong management teams, loyal customers, and innovative and hard-to-duplicate ideas that will continue to gather attention from investors in this difficult market.
"It's during these very tough times that some of the best businesses get formed," he said. "They're formed on the principles that really matter."
Copyright 2001 American City Business Journals Inc.
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