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New England startups have begun to successfully woo new investors to their board tables this quarter — after three quarters in which more than half of venture financings were limited to inside rounds.
A review of startups that received cash in the quarter shows that out of at least 53 deals so far, 32 have brought in new institutional investors, according to Mass High Tech/Boston Business Journal research. The lack of new investor participation is detrimental to the venture economy because startups often rely on new investors to expand.
In July, the high-tech economy applauded news that venture capital investment had reversed its yearlong decline, posting more deals and dollars than the previous quarter for the first time since summer 2008.
But new information shows that most of those deals were insider rounds — which means there was less cause for celebration. In the second quarter of 2009, VCs nationwide did 53 percent of their deals as insider rounds, not bringing in any new investors to participate in the funding, according to a data mash-up provided by Dow Jones VentureSource. That percentage is higher than at any time in the past five years.
Since 2004, insider rounds have been on a steady increase, according to the VentureSource data. And since the near-collapse of financial markets ushered in deep uncertainty in late Q3 2008, they have consistently been over 50 percent, and creeping upward. But fortunately for entrepreneurs, there are signs that may be changing.
“We’re very interested in writing new checks,” GrandBanks Capital managing partner Charles Lax said. The Wellesley-based venture firm is making new investments at a rate of about one a month, he said.
Its public investments so far in Q3 include participating in a $5.5 million Series A tranche for SilverRail Technologies Inc., a stealthy travel technology company based in Newton; and a $4 million first round for mobile ad firm Nexage Inc., which moved its headquarters from California to Boston with the funding.
And some companies aren’t looking for new investors, said William Schnoor Jr., a partner in the technology companies group at Goodwin Procter LLP. For executives managing a fledgling business through a downturn, tapping existing investors makes more sense than courting new backers, he said.
“New investors will want seats on the board,” Schnoor said. “Your installed base of time devoted to managing investor relations is going to go up. Those are things that management teams constantly weigh.”
For Vela Systems Inc., a new investor wasn’t worth the trouble. The Burlington-based maker of mobile project management software for the construction industry went back to its existing venture backers this quarter for a $4.5 million extension of its Series A financing from GrandBanks Capital, Commonwealth Capital Ventures, CommonAngels and Launchpad Venture Group.
With a belt-tightening that included the layoff of five people last fall, the 35-person company has shifted some of its focus away from top-line growth, and has its sights on profitability by mid-2010, said CEO Tim Curran.
“I think generally at this stage we’ve got deep enough pockets so to speak — so bringing a third at this point doesn’t really add a lot,” he said. “I’m not saying it would be a negative thing, but it would add another player to the table, and that wasn’t something we were ready to do.”
According to National Venture Capital Association President Mark Heesen, a higher number of inside rounds is to be expected as biotech and cleantech companies with long runways take an increasing share of the venture economy. But the most recent quarter’s high number of inside deals probably has more to do with current distress in venture portfolios, as investors conserve cash for the most likely prospects already in their stable.
That has some entrepreneurs frustrated.
Quincy-based Modiv Media, which makes in-store digital media for retailers, went to new investors for expansion capital, but wound up settling for a $1.5 million inside round this July, which Schaut plans will carry the company to profitability. The classic expansion round has proven a difficult sell, he said.
“They’re supposed to be taking risks,” said Modiv CEO Paul Schaut, “but they’re extremely hesitant. They’re like deer in the headlights.”
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