Week February 20th, 2004 through February 26th, 2004

Interview with Funk Ventures

Capital Hunter had the opportunity to sit down with Andy J. Funk, CEO and Managing Director of Funk Ventures, to discuss some of the most recent trends and this year's outlook for venture capital investments.

CapitalHunter: What fundamental changes do you see in venture capital investment habits this year as compared to last year at this time?

AJF: I wouldn't be surprised to see VC's ease up a little bit on the often unattractive terms that have been used for venture investments since the dot-com bust, such as full ratchets. However, I don't think valuations will improve much and entrepreneurs will most likely continue to face highly dilutive financings and down rounds, which suggests that the post-bubble price correction still continues.

CapitalHunter: What economic factors do you think are contributing to the increase in venture financing in 2004?

AJF: I think the healthier public markets and the increase in IPO exit opportunities are certainly the biggest contributors.

CapitalHunter: What industries do you think will be hot (as far as venture financing) in 2004? Or, if you were to start a business today, what type of business would you start?

AJF: "Hot" areas we are looking at right now include wireless technologies, such as RFID's, interactive gaming and biotechnology. I think industries that will have a significant impact in the coming five to 10 years will be alternative energy, home automation, wellness, education and nanotechnology.

CapitalHunter: What areas around the country do you think will be hot spots for venture activity in 2004?

AJF: I expect California and the Northeast to remain the dominant venture market this year, with a decent amount of deals also being completed in the Research Triangle, Texas, Illinois, Florida and Colorado.

CapitalHunter: Do you think it is a good time for those entrepreneurs who have been holding back on launching a business venture to get out there, raise capital and grow a business?

AJF: Yes and no. First and foremost, I don't believe in ever holding back; a good opportunity always has its place. However, this certainly is a tough environment, and it seems as if raising money these days is more difficult than it has ever been before. Any entrepreneur ready to start a business today should be aware that raising money will most likely prove a tough challenge. In fact, our firm's investment banking division has seen a tremendous increase in the number of entrepreneurs that have come to us for assistance as they find themselves unable to raise early-stage capital themselves. As a rule of thumb, eight out of 10 investments will require that the company receiving an early round of financing has a tier 1 management team, a product ready to go to market, as well as existing customers and revenues, just mentioning the bare essentials. Any entrepreneurs should keep in mind that it takes time to build a business. Capital markets and fundraising may improve significantly over the next 2 years. Therefore, I do not recommend for entrepreneurs to make decisions to postpone their business opportunities because of the current difficulty to raise capital.

CapitalHunter: What multiples are investors looking for on investments now versus last year or several years ago?

AJF: I don't think the multiples have changed significantly, but the chances of achieving them have proven much harder than a few years back. Generally, any VC will still require returns with multiples high enough to justify the investment and to generate the anticipated return for its limited partners.

CapitalHunter: What type of valuations are entrepreneurs getting these days versus last year or several years ago?

AJF: Valuations continue to stay low. Over half of the venture investments made in Q3 of 2003 were down rounds, and I expect entrepreneurs to continue to face highly dilutive financings for the remainder of this year.

With your paid subscription to Capital Hunter you can obtain immediate access to a complete detailed listing of this reporting period's 73 newly funded companies. As a paid customer, you can also use our easy-to-use tools to mine our database with over 30,000 historic equity financings.

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Venture capital investments for the first seven weeks of Q1 2004 are up from the first seven weeks of Q1 2003 by 10.68% with 268 companies receiving over $2.6 billion in venture capital. Also, the first seven weeks of Q1 2004 is up from the first seven weeks of Q4 2003 by 33.33%. Over $355 million of venture capital was invested in 27 U.S.-based companies during this reporting period. The average deal size was approximately $13.15 million. The amount of venture capital invested this period is up 78% from last week's $199 million.

Geographically, California received more than 29 of the total venture capital invested this period. The largest venture financing in California this period was by NeurogesX, Inc. for $35 million. NeurogesX, Inc. focuses on the development of products for the treatment of pain from nerve signaling disorders.

The Biotech sector raised the most venture capital this period with 40%. A total of 7 Biotech companies raised $144.9 million in venture financings. The largest financing in the Biotech sector was by AlgoRx Pharmaceuticals, Inc. which is development stage pain management company focused on building a diversified portfolio of pharmaceutical products and technologies to address the large, unsatisfied pain market.

Companies raising their Series C round of funding represented 47% of the total venture capital deployed this period. The largest Series C financing was by AlgoRx Pharmaceuticals, Inc.

The five largest venture deals this period are as follows:

The following thirty five investors funded the above mentioned top five venture capital investments in excess of $187 million:

Below you will find a breakdown for this reporting period of equity financings in the United States, Canada, and internationally:

NOTE: All the investments highlighted as "equity" in the above table are non venture capital investments such as IPO's, PIPE's or public secondary offerings.

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