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Times tough for startups in need of venture capital

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By John D. Oravecz
Saturday, March 30, 2013, 12:01 a.m.
 

Startup companies looking for investment capital from venture capital firms have been having a tough time of late.

But that may improve as private equity/venture capital firms such as Draper Triangle Ventures and the Pittsburgh Life Sciences Greenhouse work to raise more money for investments.

“We are ready to start investing again,” said Mike Stubler, managing partner at Draper Triangle, one of Pittsburgh's most active early-stage venture firms, with more than $80 million invested in 26 companies in the region.

Early-stage companies generally have a business under way, often funded by founders or family, based on an early version of their product or service. Such companies need investors to put in more money to continue development and growth.

Draper Triangle said it has raised $40 million of a projected $75 million to $100 million for a fund called Draper Triangle III. While it continues to raise more, typically from pension funds and university endowments, it will start investing what it has, Stubler said.

The firm's earlier funds, Draper Triangle I with $52 million, and II, with $72.5 million, are fully invested.

“One of the issues locally is that investment money for early-stage companies has been at historic lows,” Stubler said. “It's an opportunity for us.”

A contraction in the venture capital industry nationally in the wake of the Great Recession resulted in less money available and fewer firms.

Amounts raised declined to a low of $13.7 billion in 2010 by 176 firms from $35.6 billion by 215 firms in 2008, according to Thompson Reuters and the National Venture Capital Association. In 2012, fundraising recovered to $20.6 billion by 182 firms, despite a 35 percent falloff in the last three months, when the top five firms nationwide accounted for more than half of all fundraising.

In the Midwest, the low level of money available to invest in early-stage companies is “unprecedented” compared with the number of promising startups seeking capital, said Draper Triangle Managing Director Jack Katarincic.

Nationally, venture capitalists invested $26.5 billion in 3,698 deals in 2012, a decrease of 10 percent in dollars and a 6 percent decline in deals over the prior year, according to the MoneyTree Report by PricewaterhouseCoopers and the NVCA, based on data from Thomson Reuters. In the fourth quarter, investments of $6.4 billion in 968 companies fell 3 percent.

In the Pittsburgh region last year, venture firms invested $168.97 million in 79 deals. Those numbers have gradually increased from a low of $109.9 million in 59 deals in 2009.

The biggest deals last year were $20 million to Avere Systems Inc.; $20 million to Thorley Industries LLC; $15 million to TriStar Investors Inc.; $15 million to Duolingo Inc.; $14.9 million to Knopp Biosciences LLC; and $11.9 million to BodyMedia Inc.

Most of those investments came from out-of-town venture firms.

“There are a lot more good opportunities out there than there is money,” said Mel Pirchesky, president of Shadyside-based Eagle Ventures Inc. “But if you've got a great deal, then it is financeable.”

In his experience, a great opportunity comes from about one in 20 early-stage companies.

The slow growth economy, high unemployment, and a still-uncertain economic future are reasons for lack of investment money, he said.

“One thing is true. Pittsburgh is a great city for startup opportunities because of the research being done at Carnegie Mellon (University) and (the University of Pittsburgh). Research begets new opportunities,” Pirchesky said.

The Pittsburgh Life Sciences Greenhouse is working on raising $25 million or more for a second Accelerator Fund, targeted at startup life sciences companies, said CEO John Manzetti.

In 2011, the Greenhouse completed fundraising for its first Accelerator fund with $8.1 million that is now fully invested.

“They are the only funds in the region to focus on life sciences,” he said.

Especially for the first fund, with fundraising “at the worst possible time, it was very, very difficult.” Manzetti said. “The general economic conditions make people think more than a few times about where to put their money.”

Fundraising is still difficult, but he expects the second fund will be closed sometime this year.

The Greenhouse, a nonprofit with offices on the South Side, is partly funded by the state.

John D. Oravecz is a staff writer for Trib Total Media.

He can be reached at 412-320-7882 or joravecz@tribweb.com.

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