Investment climate improving for area firms needing capital

Originally published: Feb-08-2004

From The Buffalo News
By FRED O. WILLIAMS
Buffalo News Business Reporter

Ready to believe in a pill-size electronic device that can sense what ails you - from the inside? How about a security system that uses radio technology to track people the way E-ZPass tracks cars?

These are a couple of the high-tech ideas that are being cooked up in the Buffalo area.

Small ventures that are long on ideas but short on capital are sprouting up, after a long dormancy following the technology bust of 2001. Entrepreneurs are eager to build companies again, but it's unclear that investors are ready to unclench their fists and give them a hand, after getting burned by the dot-com meltdown.

"A lot of (venture firms) around the country say they're looking at more early-stage companies, but the data so far doesn't bear that out," said Kirk Walden, national director of venture financing for PriceWaterhouseCoopers.

Investments by venture funds continued to decline last year in upstate New York, extending a downturn that began in 2001, according to the accounting firm's MoneyTree survey of venture firms. Investments fell nationally as well, though at a slowing rate, which indicates the decline may be leveling off.

Upstate companies attracted $120 million in venture investments last year, less than a third of their total in 2000, according to the survey, conducted for PriceWaterhouse by Thomson Venture Economics and the National Venture Capital Association. The survey is estimated to measure 90 percent of venture deals.

But there are also signs that investors' deep distrust of risky young companies is beginning to crack. Though there was less money, there were more venture deals for upstate companies last year than in 2002, the survey said. How many of the capital injections came to Buffalo-area companies wasn't reported.

Also, the market for initial stock offerings is coming back, an important barometer of investor confidence. There were five IPOs nationally last month, compared to zero in January of 2003 and one in January 2002, according to IPOfinancial.com. In addition to providing investors an opportunity to cash out their stakes in companies, IPOs provide a market pricing mechanism that helps venture funds put a value on start-up companies they invest in.

The investment climate is important for Western New York's economy because capital is critical for homegrown companies to grow and generate jobs. In addition to information technology start-ups, a number of biotech ventures are begining to spin-off from university-backed life science research.

SmartPill Diagnostics in Buffalo is looking for several million dollars to further develop its ingestible device. The diagnostic tool for gastrointestinal patients is about 18 months away from generating sales, and faces regulatory tests in the meantime.

"I would say (the climate) is looking up - I think it's starting to come around," chief executive David Barthel said. Having attracted some funding, Barthel said he believes the company will succeed in meeting its capital goals, although it is looking outside the Buffalo area to do so.

At Intuitek in Buffalo, David Straitiff is getting ready to ask for $300,000 to $500,000 to help fund production of his company's electronic ID systems. Intuitek has developed a security/identification system with hardware that plugs into a PC, to track documents or to protect access to computer networks.

"You really need to show (investors) a product and a customer base - just a business plan won't do it," Straitiff said.

Straitiff expects to tap private investors rather than venture firms for start-up funds. Such "angel" investors, from the ranks of wealthy individuals locally, are critical sources of early stage funding.

The Western New York Venture Association holds meetings for venture capital and angel investors, where young companies make their pitch. About 15 to 20 new companies a year are selected to make presentations before the group. "We've been seeing more potential candidates," said Jack McGowan, coordinator of the association. Not long ago, "we would struggle to find two (companies) we felt comfortable putting before the group."

Some local angel investors are forming a network that will help them evaluate local start-up companies, McGowan said. By sharing the chore of evaluating companies, the loosely knit group of about 15 people may lead to increased angel investing, he said.

However, some local investors say they're not sure the business climate has improved enough to justify the risks of investing in start-ups. "I think people have a higher sense of optimism in the economy because of what's going on in the (stock) market - but frankly, I just don't see it," said Jordan Levy, an independent investor who is also a managing general partner of Seed Capital Partners in Buffalo.

In a departure from usual technology-oriented deals, Levy and two other individual investors recently purchased 17 Subway sandwich stores. Levy called it an "opportunistic" investment, rather than a shift away from technology companies.

Ronald Schreiber, one of Levy's partners in the Subway deal and other investments, said that technology start-ups have continued to produce innovations right through the funding downturn. But while venture firms like Seed Capital continued to invest, "angel investing has essentially dried up," he said.

Of venture investing that is occurring, much is targeted at existing companies that need second-stage capital to further their growth, said Walden at Price-
Waterhouse.

Life science companies are far and away the most popular industry for venture investing, according to the survey, attracting 27 percent of funds last year. Companies with life-extending and life-enhancing products are seen as having a strong market.

Investment in biotech was strong "even during the (infotech) boom years," Walden said. "It just wasn't as dramatic as what was happening to dot-coms."