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Venture Reports

A Year in Review with Venture Capitalists

February 15, 2005

GCVA panelists
The Greater Cincinnati Venture Association's 2004 Year in Review was conducted by a panel moderated by Gus Long of Ft. Washington Partners. Panelists were David Jones, Jr. of Chrysalis Ventures, Louisville, KY, with $200 million under management; Glen Mayfield of River Cities Capital Funds, Cincinnati, with $300 million under management; Jack Wyant of Blue Chip Venture Company, Cincinnati, with $600 million under management; Bob Zieserl of KB Partners, Northbrook, IL, with $100 million under management; and Mark Heesen, of the National Venture Capital Association.

Long characterizes regional activity as strong, with 46 deals totaling $104 million completed in 2004. He pointed out that while there was a lot of activity in the region, all firms represented on the panel were also active on both coasts. Mayfield feels this is representative of the general increase in deal flow after the bubble, while Jones says their activity has been steady over the past 3 years. Zieserl believes part of the coastal increase is due to seeing companies with several management layers with deal experience.

Industry-wise, Software and Services and Healthcare dominated 2004, both in number of deals and total volume. Both Mayfield and Jones feel this is consistent with their overall strategy, although Jones says Chrysalis has been more bullish in Communications, especially Telecommunications, and has had good progress with buying distressed assets. Zieserl says Healthcare is more of a focus for KB, but they are also seeing tremendous advances in Technology. Wyant believes the increase in Healthcare deals is reflective of their tackling long-term problems such as billing, scheduling, etc. Heesen also pointed out how a region's focus can affect growth in the area. For instance, Tennessee decided to make Healthcare a state-wide focus and has seen a large increase of out-of-state funding.

While Long pointed out that nationally over the past 10 years, seed investment has provided the highest level of return, regional activity has focused on expansion at 55% and early stage at 34%. Mayfield says RCCF has never focused on seed stage since they want to interview real customers. Zieserl says historically, they have not been rewarded for early stage investments but he hopes this is changing, and Jones highly values later stage deals, as Chrysalis tends to be cautious. However, Wyant says Blue Chip is interested in seed deals closer to home. In fact, they funded two enterprises from start-up last year, one medical, one internet-based. He feels as the environment improves, they will be willing to take more steps in this direction.

Reserve levels have stayed about the same for all firms, ranging from 30-50%. As Mayfield says, most successful venture capital firms have conservative reserve policies - that's how they have survived.

Exit activity has been greatly influenced by congressional acts such as the Sarbane-Oxley Act of 2002. Wyant feels the impact of this act is not fully understood, and called on Heesen and his colleagues to work harder with Congress. Heesen agrees, saying one of the biggest impacts on the last 10 years is Sarbane-Oxley. The NVCA is working to lessen the blow on smaller companies. While Hessen believes the Act won't be appealed, it will be "tinkered around the edges."

Continuing the discussion on exit activity, Jones says it's too expensive to list an IPO today - Chrysalis had six opportunities to exit last year that fell apart, as 1.3x return is not enough to motivate them to sell a good company. RCCF also focuses on exits through sales to strategic partners since their general level is $25-100 million, not a magnitude to be attractive in a public offering. This is also true for KB, although Zieserl worries about changes to leverage in M&As as IPOs become less of an option. Instead of the pressure placed on strategic partners in the past due to the threat of an IPO, companies will now need multiple partners willing to pay real dollars to keep deal level high.