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Finding seed money is a venture

I had such a good time at PitchFest'03 that I went back again this year. Under the slogan of "Be a VC and Buy a VC," (venture capitalist, for those outside the high-tech cosmos), this popular event gives entrepreneurs a showcase for their innovative new products or services.

Everyone in the audience is a VC for the balloting of the best presentation that rewards the winner $10,000 seed money. To buy a VC, the attendees bid for time with a real VC at a live auction while the ballots are tabulated.

PitchFest'04 featured three competitors selected from 55 submissions by a panel of business experts. The startup proposals ranged from a back pain surgical procedure to a management assessment profiling method and a cyberspace filtering service for hosted networks. Each concept received an enthusiastic audience response and many challenging questions. This year's winner was Dynamic Spine, a patented device and process to relieve chronic back pain.

John Otterson, a San Diego Venture Group board member and venture capitalist himself, observed that the auction for the expertise of a VC is a unique opportunity. He told The Daily Transcript, "Where else can you turn the tables on the VCs and set the valuation with your bid?"

Venture capital funding in San Diego shows signs of recovery after the bubble burst in 2001. According to MoneyTree Survey, a national tracking scheme for VC deals, the third quarter of 2004 showed 27 fundings totaling $312 million. Although only half the amount of the peak third quarter of 2000, with 67 deals at $612 million, there has been steady improvement since the end of 2002.

This is better than the national trend because San Diego has an edge in the development of new drugs and biomedical devices. There is a shift in VC deals from early-stage companies to better-established firms seeking second-stage capital. This is especially evident in the biotech industry. The preference today is for a product already into clinical development, observed a major VC.

The historical rate of success for venture capital investors is not high. Based on projected investment return, only about 20 percent of the VC-funded startups make their goal. Those who don't go out of business usually plug along without fulfilling the speculators' investment returns. That's why the large VCs lighten their portfolios periodically with fire sales of their nonperforming companies.

Every VC hopes to find another Microsoft. If the startup has a realistic business plan and committed management, success is achieved by the few. Bill Hewlett and David Packard started in their garage; Cisco Systems was turned down by dozens of VCs. One San Diego champion was once a typical mom and pop business that navigated the bumpy road to find development capital.

Dennis Mudd, founder of Musicmatch Inc., struck his pot of gold in September when Yahoo bought his company for a cool $160 million. The product is best described as a digital jukebox for downloading music.

Mudd was the keynote speaker at last year's San Diego Software Industry Council's conference featuring 12 candidates for VC funding. His story of taking a garage operation into successful private capital funding was a textbook model for survival in a sea dominated by giant entertainment and media sharks.

The concept for Musicmatch grew out of a master's thesis at the Wharton School. The professor graded it a "B" and told Mudd the business model was unrealistic.

Escalating litigation for copyrights and intellectual property was destroying the growth of the Internet music market when Musicmatch launched its new concept. Mudd's advice for the new guys on the VC block was, "There are no shortcuts to integrity and profitable growth." It obviously worked for him.

I wonder if the academics at Stanford Business School told the two young students with the Google concept that their business plan for a search engine was unrealistic? Starting with $25 million of venture capital, Google has exploded in six years into a market value of $54 billion since going public last August.

Mayor Dick Murphy proclaimed October as San Diego Innovation and Investment Month in collaboration with several economic support groups like UCSD CONNECT, San Diego Software Industry Council and San Diego Regional Technology Alliance. Special events for the month included PitchFest'04, sponsored by San Diego Venture Group and San Diego Telecom Council with support from Ernst & Young, Foley & Lardner, Morgan Stanley and Marsh.

This alliance covers most of the experts in how to develop, finance and market an early-stage company. San Diego has a growing reputation as the nation's incubator for new biotech and software.

UCSD CONNECT Springboard program offers help to an early-stage entrepreneur by critiquing the business plan and evaluating growth strategy. Other consultants from government consortiums, academia and industry create fast-track methods to move a product from lab to market. A group called San Diego Tech Coast Angels can also help.

Bill Payne, one of the "angels," told The Daily Transcript that seed money traditionally comes from family, friends and fools in the early stage of the capital food chain. I suppose that's why getting seed money for a new idea is called a venture.

Ford is a freelance writer located in San Diego. He can be reached at johnpatrick.ford@sddt.com

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