By PUI-WING TAM
DALLAS — The 16th floor at Two Galleria Tower and similar outposts once were touted as the new Silicon Valleys, where clusters of venture-capital firms sprouted to fund the latest technology start-ups.
Now, amid a tough fund-raising climate and poor venture returns, the 16th floor and others like it across the nation have gone quiet. Instead, the venture-capital industry is consolidating in its centers of Silicon Valley in Northern California and Boston as the recession pushes regional players out of the market.
“Dallas is an entrepreneurial city, but it won’t be driven by venture capital going forward,” said Daniel T. Owen, a venture capitalist at the 16th-floor firm H02 Partners, which plans to wind down its venture business over the next few years. “The pure venture-capital model is really thriving in just Silicon Valley and Boston.”
In its heyday a decade ago, the 16th floor was abuzz with cash-rich and active venture firms such as Sevin Rosen Funds, which backed winners such as Compaq Computer Corp. and Ciena Corp. Sevin Rosen’s success attracted a half-dozen other venture-capital outfits to set up shop on the same floor, complete with a shared kitchen and conference rooms, including H02 Partners, CenterPoint Ventures, Hunt Ventures, Hook Partners and others.
Today, many of the firms are running out of cash and have stopped investing in new start-ups. Of the half-dozen firms, only one has raised a new fund in the past three years, and others have been having trouble raising money. At least two have given up on venture capital altogether.
Sevin Rosen has been trying to raise a new fund totaling about $300 million since early last year, but the effort remains a work in progress. The firm has told entrepreneurs that it isn’t investing in new start-ups until it closes a new fund. Meanwhile, CenterPoint Ventures, which previously backed enterprise-technology maker Voyence and has invested in mobile-content provider Handango, acknowledged its 2007 fund-raising efforts failed after investors demanded to see returns from earlier funds. Like H02 Partners, Hook Partners also is winding down its venture business and is instead reinventing itself as a private-equity firm.
The stumbles on the 16th floor illustrate how regional venture-capital centers are taking a disproportionately large hit in the recession. Dallas venture firms, in particular, invested in local start-ups that specialized largely in telecommunications and networking, many of which have flopped amid a weak telecom sector and a slow initial-public-offering market.
At the same time, these firms are running into unreceptive investors, many of whom are shifting away from investing in regionally based venture firms that have lower name recognition to the brand-name venture firms on the coasts.
Through mid-September, no venture firm in Texas had completed raising a new early-stage fund this year, down from five new funds totaling nearly $900 million in 2006, according to research firm VentureSource. Only six new venture funds have been raised in New York this year, totaling $486 million, down from 14 new funds with $1.9 billion in 2006. In Washington state, only two new venture funds totaling $19.2 million have been raised this year, down from five funds with $507 million in 2006, according to VentureSource.
Overall, venture fund-raising is down this year, with just 83 new funds totaling $8 billion raised in the U.S. through the end of September, according to VentureSource. In 2006, 205 new venture funds totaling $30.5 billion were raised. As a result, the venture industry’s core markets of Silicon Valley and Boston, which boast a deep ecosystem of entrepreneurs and are anchored by firms such as Sequoia Capital and Kleiner Perkins Caufield & Byers, are holding up better. This year, Silicon Valley and Boston venture-capital firms have snared 63% of all the new venture money raised, up from 50% in 2006, said VentureSource.
Silicon Valley venture firm Khosla Ventures, led by venture capitalist Vinod Khosla, closed on two funds totaling about $1 billion in the third quarter. Meanwhile, first-time venture capitalist Marc Andreessen, a founder of Netscape Communications, also closed on his debut venture fund of $300 million in the quarter.
The dearth of active venture money in Dallas has become so pronounced that many local entrepreneurs are bypassing hometown venture firms for other funding sources.
Bill Rodgers, chief executive of Blastoff Communications Inc., a Plano, Texas, Internet start-up, said he has raised $1.25 million since 2007 primarily through individual investors. He said he didn’t go to venture capitalists, partly because the Dallas venture scene “isn’t as strong” as it once was.
“If you look at who’s investing in venture, those roads lead you out of Dallas,” said Mr. Rodgers.
New venture-capital activity on the 16th floor hasn’t completely faded. Last year, Hunt Ventures raised a $140 million fund and is now scouting for start-ups to invest in. A CenterPoint venture capitalist who left that firm this year also has set up a small secondary fund dubbed Delta-V Capital on the floor.
Still, Jeff Williams, a venture capitalist at Hunt, said the number of venture firms in the state “will continue to scale down.”
Write to Pui-Wing Tam at email@example.com