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 October 8, 1999

Fund raising tough for VCs, too

Ask anyone in the high-risk world of venture capital, and they’ll tell you the toughest – and probably less-liked part of the their job — is fund raising.

As an existing fund becomes fully invested and a new fund must be raised, these venture capitalists put on their sharpest suits and travel around explaining to pension fund managers, foundations and well-heeled friends and business associates why they should hand over their money to be invested in start-up companies.

AIt=s not the thing I enjoy most,@ said Chris Roser of the Boulder-based father-son team Roser Ventures. AFund raising is a lot hard work. Through relationships you find people who would be interested in investing money. Then you have to go there and make a presentation. You have to do to them what the companies (looking for money) do to us. >Give us some of your money,= we ask..”

But if there was ever a time to ask for money, this may be it for VC firms.

Venture capital investments across the United States – fueled by an on-fire technology sector and new Internet ventures – soared to an all-time high in 1998 of $14.27 billion. In Colorado alone, according to PricewaterhouseCoopers, venture capitalists invested $518.2 million in state firms, with technology-related companies getting 81 percent of the money.

And there’s been little slowdown in 1999 – the second quarter absolutely crushed the previous quarterly record for VC investments in Colorado, with $307 million pouring into companies here, nearly doubling the former record of $159.8 million set in the second quarter of 1998. Fifteen Boulder County companies got part of the VC funding prize to the tune of more than $171 million.

Individual investors, who are just a few branches on the big money tree, are eager to see a high return on their investment, and with the stock market riding high and public offerings bringing multi-millions to technology start-ups, they’re willing to take the higher risk.

Institutional investors, the bulk of the money, are just as eager to see higher returns while the market is favorable. The state of New Mexico, for example, is investing $50 million of its $12 billion employee pension fund into start-ups. Colorado Venture Management of Boulder is building its sixth fund with some of New Mexico’s money.

And Boulder Ventures, which just closed its third fund totaling $86 million (see story, Page 4A), brought in several larger institutional players in this time, including Mellon Ventures, an arm of Mellon Bank, and money from the state of Maryland, which has created its own Enterprise Investment Fund. The University of Colorado Foundation also is an investor with the Boulder-based company’s third fund.

Kyle Lefkoff, one of five partners in Boulder Ventures, says when they launched their first $3.5 million fund in 1996, they had to build it almost entirely with individual investors. But this time around, institutional investors contributed about $36 million.

Pension fund managers generally invest less than 5 percent of their total fund into venture capital, according to VC firms, with the lion’s share going to mutual funds. But the small percent amounts to a lot of cash, especially for smaller VC firms that may only be seeking a few million dollars.

For smaller firms that want to maximize their fund-raising efforts, the Small Business Administration, through its Small Business Investment Company (SBIC) program, matches funds raised by VC firms. To get licensed as a SBIC, the company must have $5 million in private capital — more is preferred — and over a period of time the SBA, at its discretion, can match up to three times the firm’s private capital.

SBA is a participating investor with Roser Ventures as a limited partner. The money is raised by selling debentures that are guaranteed by the SBA. In the early years of an investment, SBA pays the interest, until the investment starts to pay off. Then the SBIC (Roser Ventures) pays back the SBA plus interest and also gives SBA a share in the profits, which usually equals about 10 percent. SBA turns over the money to the U.S. Treasury.

Roser says his firm is the only one in Boulder whose funds are matched by the SBIC program. “It=s becoming more a prominent feature for smaller firms under $100 million,´ said Chris Roser, a partner with his father. “When you get up to $2, $3, $4 million, it’s not worth it. But it’s not overly onerous.” Roser Ventures manages four funds totaling $74 million. The fourth fund raised $52 million. The firm plans to resume fund raising in the fourth quarter of 2000.

Between 1994 and 1998, the number of SBIC licensees in Colorado jumped from 12 to 53, and the amount of money invested in them mirrored this rise, from $17.7 million to $82.2 million. Return rates to the licensees rose in the last three years from 13.58 percent to 19.36 percent.

John Greff of Boulder-based Sequel Venture Partners says his firm primarily targets institutional money to raise capital. Although they have some individual and corporate investors, “It would be tough to raise a large pool of capital from these investors alone,” Greff said. Sequel just raised a $155 million fund, its largest to date.

Some VC firms, including newer funds just getting off the ground, rely on individuals such as their friends and professional contacts to raise money before establishing enough clout to go after institutional money.

“We’ve had a few institutions, but we don’t have big funds,´ said Pete Bloomer of Colorado Venture Management in Boulder. “We have a network of individuals that we raise money from and they are co-investors, so they invest in the fund and have the opportunity to invest in the start-ups.”

Bloomer started CVM in 1980 by going to high net-worth individuals who were looking for a high return on investments. Today, the firm still relies on individual investors, and its funds tend to be small – $50 million and under.

“Usually when individuals come to us with a business plan, it’s one or two people involved very heavily and they have their own money and sweat equity in it,” Bloomer explains. “They are looking to build a team and leverage an opportunity in a market space. We’re doing deals at the $500,000 range, not moving at the speed of the Internet.”

Bloomer said CVM’s first fund was $1.6 million. On those first six investments, the firm returned $9 million.

Getting started in the VC world may be the most challenging part of the business. But the Boulder Corridor is one of the top five markets in the country for venture capital, according to Chris Roser, whose firm initially invested in Hauser Chemical, Carrier Access and Alfalfa’s Market, among others.

Ask anyone in the high-risk world of venture capital, and they’ll tell you the toughest – and probably less-liked part of the their job — is fund raising.

As an existing fund becomes fully invested and a new fund must be raised, these venture capitalists put on their sharpest suits and travel around explaining to pension fund managers, foundations and well-heeled friends and business associates why they should hand over their money to be invested in start-up companies.

AIt=s not the thing I enjoy most,@ said Chris Roser of the Boulder-based father-son team Roser Ventures. AFund raising is a lot hard…

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