Sunny skies, and 2010 looks even better

Dateline: Santa Monica, California

There are definitely worse places to be in the second week of December than Southern California, even if the work days are 15 hours long.

It has been just a month since we opened out first U.S. office and recruited our first new team member in Eric Speer (see prior post “Wellington opens California office” Nov. 13-09). The deal flow began almost immediately, and it was high time that I got myself down here to meet some of the local VCs and advisory network.

The mood is positive among the tech community. The U.S. IPO market has launched a few tech names this Fall, and dozens of VC-backed companies could to be filing in Q1 or Q2 of 2010. For anyone in the VC industry who wants to raise LP capital in late 2010, the sense on anticipation is clear.

If the IPO window stays open long enough, and the pension fund and endowment denominators continue to grow, VC allocations may not suffer the level of cutbacks that has been feared throughout 2009.

The US$11 billion drop in year-over-year VC funding has a few people worried, since there are no fewer entrepreneurial ideas this year than last; what impact will this have on innovation longer term? Moreover, there is definite concern that a bunch of 2009’s invested capital went into existing portfolio companies at the expense of new deals. Whether it be the recession or growth opportunities, people here have been as portfolio-focussed (at least for the first six months of the year) as those of us in Canada.

And then there’s the dominance of Silicon Valley, which some months is attracting 50% of all U.S. venture capital deployed. According to PWC’s MoneyTree report, Q3 wasn’t great for many regions, including Southern California:

Ten of the 17 MoneyTree regions experienced a drop in venture-backed funding in Q3 2009. Regional leader, Silicon Valley saw a 63 percent jump in investments and an 11 percent increase in deals—going from $1.4 billion in Q2 2009 to $2.2 billion in the third quarter. With a 60 percent decrease, Sacramento/N.Cal had the biggest drop in the number of deals completed for the quarter while the South Central region saw a 57 percent increase in deals over the second quarter. Taken together, the top three Q3 2009 regions —Silicon Valley, New England and NY Metro — accounted for 63 percent of the investments and 54 percent of the deals reported.

As a nation, the U.S. is back to 2003 VC quarterly investing levels, with a US$1.5B uptick over Q1 2009. At this point, Wellington Financial’s goal is to spread the good word about the benefits of term venture debt versus the traditional amortizing structures that most other venture debt funds use in this part of the world. And many VC have learned to embrace the fact that not all venture debt funds are the same: some get the majority of their capital from commercial banks, while others, like us, are 100% funded by institutional equity.

For us, the fact that Orange Country/LA and San Diego rank as the #5 and 6 markets in the U.S. last quarter is a positive sign. Not as much capital flowing around as in the Bay area, but still plenty of action to benefit from our True Growth Capital product. And rumours of a US$98 million VC wipeout this week, including US$18 million from a lender, is a perfect reminder that this line of work sounds easier than it really is.

If you are looking for a new blog to follow, I can tell you one of the most popular VC blogs in Southern California is “Both Sides of the Table”, written by a partner at VC fund GRP Partners in Los Angeles.

On the deal flow front, our head start on the East Coast means that two of the next three deals we close will hail from the North East U.S.A., but it won’t be long before we are on the map here too. The VCs and advisors are welcoming, love the tern venture debt product, and appreciate the fact that we’ve set-up shop in a relatively underserved market.

Off to the next meeting…

MRM