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A surge for startups -- but what's next?
Direct Flow Medical is developing a medical device to replace heart valves without risky surgery. Direct Flow raised $27 million in a second-round deal last fall.
Photos by KENT PORTER / The Press DemocratPublished: Sunday, January 27, 2008 at 3:34 a.m.
Last Modified: Sunday, January 27, 2008 at 3:34 a.m.
After a strong start in 2007, venture funding for Sonoma County tech companies slowed in the second half of the year -- a sign that 2008 could be a challenge for startups.
Still, seven local companies raised $175 million last year, the best performance since 2002.
Overall, venture funding almost tripled last year in the 707 area code, which includes Sonoma and Napa counties. The previous year, local companies attracted $60 million in venture capital.
The local deals reflected a surge in new funding for startups last year across the United States. Venture capitalists pumped almost $30 billion into U.S. companies last year, up 8 percent from 2006.
It was the best year for U.S. venture funding since 2001, said Jessica Canning of Dow Jones VentureSource, a San Francisco research and consulting firm that tracks private equity deals.
"It's clear that venture capitalists are eager to back innovative technologies," she said.
Medical technology, clean energy and Web 2.0 applications were some of the hottest investments, Canning said. Investors also put more money into follow-up deals, she said.
"Investors are willing to support entrepreneurial companies longer, with round sizes that are at the highest levels since the heady dot-com days," Canning said.
But the economic slowdown in the fourth quarter has some investors predicting a decline in 2008. While a December survey by the National Venture Capital Association found many firms bullish, a significant number said the credit crunch will leave less cash available for startups.
A recession could lead to a shakeout in the funding business, the survey indicated.
Venture capitalists cash out when startup companies go public or get acquired, so they depend on a strong economy to fuel demand for mergers and IPOs.
Venture funding is lifeblood for early stage companies, said Bernie Lyons, chief executive officer at Direct Flow Medical, a Santa Rosa startup developing a medical device to replace heart valves without risky surgery.
Direct Flow raised $27 million in a second-round deal last fall. Besides providing money for product development and testing, venture partners bring business and technical expertise, he said.
"In addition to capital, it's the people that become our board members, advisers and investment partners," Lyons said. "We want to make sure the people around the table are credible, knowledgeable, value-added and financially strong."
"The investors in Direct Flow Medical meet these requirements, because they're top-tier, experienced medical-device people," he said.
The investment from Johnson & Johnson Development Corp. and Foundation Medical Partners will help Direct Flow hire more workers and expand clinical trials in Europe, he said. Founded in 2004, the company now has about 25 employees.
It wasn't the only Sonoma County startup to receive venture capital in the second half of 2007. Teknovus, a Petaluma company that makes technology for telecommunications networks, raised $28 million in September.
The fourth round of funding will help Teknovus develop next-generation products and expand sales in North America, said Julie Kunstler, the company's vice president of business development.
Teknovus' computer chips help telephone and cable companies deliver voice, video and data over broadband networks. Its biggest customers are in Japan, South Korea and China, but Teknovus is starting to build a customer base in the United States and Canada, Kunstler said.
"We're heavily focused on the Asian market and that remains strong going forward," she said.
Teknovus doubled its sales in 2007, Kunstler said, although the privately held company does not disclose its revenues. Founded in 2002, Teknovus has about 65 employees at its Petaluma headquarters.
Another Petaluma startup, Cyan Optics, raised $17 million in last year's fourth quarter.
Cyan was founded in 2006 by Mike Hatfield, a Telecom Valley veteran who played leading roles at Advanced Fibre Communications and Cerent Corp. Those companies were acquired by Tellabs and Cisco.
Cyan is developing technology for next-generation broadband networks but hasn't launched a product yet, and it's not ready to release the details, Hatfield said Friday.
The funding followed a first-round investment of $8.7 million earlier in the year. Both rounds were led by Azure Capital Partners, an equity fund that specializes in telecom startups.
The largest Sonoma County venture deal of 2007 was scored by Calix Networks. In a late-stage financing that closed in June, the Petaluma telecom equipment vendor raised $57.5 million from Foundation Capital.
The median U.S. venture deal in 2007 was $7.6 million, up slightly from $7 million in 2006, Canning said. Later-stage companies such as Calix got larger amounts because they are closer to being acquired or going public, she said.
"In 2007, the median amount invested in later-stage rounds reached $11.8 million, the highest in more than six years," Canning said.
You can reach Staff Writer Steve Hart at 521-5205 or steve.hart@pressdemocrat.com.
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