VC Activity Heats Up in Flurry of Deals By SHELLY GARCIA Senior Reporter Four separate venture funding deals closed in the greater San Fernando Valley in the past two weeks, bringing about $30 million in new financing to the area. The moves come as venture capital funding activity picks up across the country and reflect what many say is renewed optimism in the funding markets. “It’s definitely picked up,” said Jeff Crowe, venture partner at Norwest Venture Partners LLC, a Palo Alto company that has just invested in 5Square Systems Corp., a Westlake Village-based software developer. “You’re seeing more potential investments, more small companies looking for investments than a year ago. You’re seeing better companies with better management teams.” 5Square, which provides auto dealers with software and services designed to quicken and simplify the car buying process, received $12.3 million in a round led by Norwest and Storm Ventures. Encino-based TechnoCom Corp., a developer of technology that enables carriers and others to determine the location of cell phone callers, received $6.7 million from a VC team led by Timeline Ventures in San Diego. Ascendent Telecommunications of Encino, a developer of switching technology that connects mobile communications systems to the main communications hub, was reported to have received $7 million. (Ascendent officials declined comment.) Finally, Sherman Oaks-based InQ, which develops live-chat technology for e-commerce companies, closed a $4.5 million round led by Dolphin Equity Partners LP and Hudson Ventures. Venture funding fell precipitously after the Internet bubble burst in 2000. The failure of many of those businesses, a shutdown in capital spending that closed many markets to new products and the virtual disappearance of the IPO market, which cut off exit strategies for would-be investors, led VCs to retrench some even returned investments already in their war chests. “When the market burst, many of the VCs were spending much of the time focusing on investments they already made and figuring out what to do with them,” said Kris Kaufmann, a partner at Deloitte & Touche USA LLP. Now they’ve worked out a lot of the problems in their portfolio and they’re beginning to focus on new investments.” While spending overall continued to drop last year, the decline has slowed, according to the “Money Tree Report” published by PriceWaterhouseCoopers LLP in partnership with Larta Institute, a technology think tank. VC funding in Southern California totaled $1.7 billion in 2003, down 22 percent from the $2.2 billion invested in 2002. Investments along the 101 Corridor in 2003 totaled $207 million, down from $215.6 million in 2002, the data revealed. “The pig is through the python,” said Randy Churchill, director of business development for the PricewaterhouseCoopers. “There’s a wealth of good management talent available. There’s good technology and capital expenditures are coming back.” Different strategy What gets financed, however, has changed dramatically since the heady dotcom days when a business plan scribbled on a napkin could command millions in funding. Today most of the companies that succeed in getting funded already have customers and a revenue stream. Consider TechnoCom, a nine-year-old company that started in its founder’s kitchen and plans to use its new funding for expansion of its products and its sales activities. “For nine years we have been revenue producing and profitable,” said Masoud Motamedi, president and co-founder. TechnoCom provides the technology needed for 911 dispatchers, paramedics and agencies like the California Highway Patrol to determine where a cell phone call is originating from so that it can be routed to the closest emergency assistance location. The company counts among its customers seven of the 10 largest telecom carriers, and an FCC mandate that requires different agencies to adapt these systems promises to expand the market further still. “What is happening now is these location systems being used to provide e911 services are becoming operational,” Motamedi said, “Part of our offering is to look at the quality of service and the operational issues and our software is geared to do exactly that. I believe that was a big factor.” Market forces also played a role in the story 5Square had to tell its investors. With greater parity in car quality between manufacturers, many dealers are now turning to the in-store experience as a way to differentiate themselves from the competition. 5Square’s products help to accomplish that by making the car-buying experience easier and faster. But officials say that the overriding elements in the company’s story were the customers already using its products, and a management team that includes members who not only have first-hand prior experience in the auto industry but have also successfully developed and sold startup technology companies in the past. Among them, Yuri Pikover, chairman and CEO, was a co-founder of Xylan Corp., which was sold to Alcatel for $2 billion. “We had at least seven or eight VC firms that were excited about investing with us,” said Douglas Hill, who heads the company’s marketing efforts. “We have a chance to be the dominant player in our industry, and they can’t afford to invest in somebody that’s going to be No. 2. Second, it has to be a large space and automotive retailing is a $65 billion a year industry. And the third thing is we had a team with a proven history of success.”
