Week February 27th, 2004 through march 4th, 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.

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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 $483 million of venture capital was invested in 34 U.S.-based companies during this reporting period. The average deal size was approximately $14.21 million. The amount of venture capital invested this period is up 36% from last week’s $355 million.

Geographically, 9 California companies raised $160 million in venture financings. The largest venture financing in California this period was by Fortinet, Inc. for $50 million. Fortinet, Inc is located in Sunnyvale, CA and provides network protection systems designed to break the Content Processing Barrier, and deliver application level services: virus protection and content filtering along with firewall, VPN, intrusion detection, and traffic shaping functions.

The Software sector raised the most venture capital this period with 23%. A total of 11 Software companies raised $98 million in venture financings.

Companies raising their later Series rounds of funding represented 54% of the total venture capital deployed this period. The largest later stage financing was by Fortinet, Inc.

The five largest venture deals this period are as follows:

The following twenty five investors funded the above mentioned top five venture capital investments in excess of $174 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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