Cash remains elusive for Arizona startups

by Andrew Johnson – Jan. 25, 2010 12:00 AM
The Arizona Republic

Venture-capital investing in Arizona slid more than 70 percent in the fourth quarter of 2009, providing a lackluster bookend to one of the worst deal-making years in recent history.

The economic downturn rattled investors, making it tougher for startup companies that often rely on venture capital to grow their operations.

The recession also made it more daunting for businesses – locally and nationally – to reach the financial goals attractive to investors, causing many venture capitalists to only invest in companies that already received funding to ensure their survival.

In Arizona, six mostly technology companies received $20.3 million in the fourth quarter, according to PricewaterhouseCoopers and the National Venture Capital Association’s MoneyTree Report released Friday.

One recipient in the report, grocer Sunflower Farmers Market, is incorporated in Colorado but runs most of its operations from Phoenix.

A year ago, the report counted five Arizona companies that received $75 million.

Full-year investment totals were slightly better.

Seventeen Arizona companies received $115.6 million in 2009, down 45 percent from 2008.

A report released Friday by Dow Jones VentureSource showed a similar trend, counting 16 Arizona companies that received $130.2 million in 2009, also down 45 percent from 2008.

Venture capital is used to gauge the entrepreneurial strength of a region.

Investors typically provide the funding in exchange for a stake in companies.

They hope recipients will be acquired by another company or go public at a later date, providing a big payoff for financial backers.

“Venture-capital funding is very much tied to the overall general economy,” said Andy Coumides, a partner in PricewaterhouseCoopers’ Phoenix office who follows venture-capital trends. “Once we had the recession kick in and the capital markets started to shut down,” investors became careful about where they put their money.

Nationally, venture capitalists invested $17.7 billion in 2,795 deals in 2009, according to the MoneyTree Report. In 2008, they invested $28 billion in 3,985 deals.

Despite the rough year, venture-capital experts and entrepreneurs say they see signs the deep freeze on investing is starting to thaw.

For example, valuations that banks and investors use to gauge the financial worth of a company are improving and the credit markets have loosened, said Stephanie Spong, a principal with investment firm Epic Ventures in Santa Fe.

“The ground has firmed beneath our feet,” said Spong, who helps organize the annual Invest Southwest venture-capital conference in Scottsdale. “No one’s worrying about the end of the world anymore. More people are starting to creep back into investing.”

She added that her firm is in the process of closing three investment deals initiated in 2009.

With businesses and consumers spending less because of the tough economy, companies must try to attract investors by offering products and services that address “a deep customer need” vs. “a luxury,” Spong said.

Chris Sherrell, president and chief operating officer of Sunflower Farmers Market, said companies that wisely manage their resources are still able to attract capital.

“We . . . just ended 2009 and actually achieved budget,” said Sherrell, noting the company operates in the hypercompetitive retail-grocery market.

The company, which operates 28 stores in six states, received $5 million from Pacific Corporate Group, a La Jolla, Calif.-based investment firm.

It plans to use the funding along with $30 million in credit it obtained to open up to six more stores this year.

Reach the reporter at andrew.johnson@arizonarepublic.com or 602-444-8280.

————————————–

Venture funding

Six Arizona companies received $20.3 million in venture capital in the fourth quarter, according to a new report:

-Sunflower Farmers Market, Phoenix*, $5 million.

-HVVi Semiconductors Inc., Phoenix, $4.9 million.

-41st Parameter Inc., Scottsdale, $3.8 million.

-An unidentified Tucson medical-device company, $3.6 million.

-AmpliMed Corp., Tucson, $1.96 million.

-CoreLink Data Centers, Phoenix, $1 million.

Source: PricewaterhouseCoopers and National Venture Capital Association.

*Sunflower Farmers Market is incorporated in Colorado but operates most of its business from Phoenix.

————————————–

Bob Hagen (1003 Posts)