While venture money dries up for thousands of would-be start-ups, the three young firms who pocketed the most new funding in the last quarter got more than $100 million each — seven times more than the average.
Unlike dot-coms that dominated venture-capital funding in recent years, these startups won over investors because they're in promising sectors, such as biotechnology or broadband networking. Their business models are based on real products and revenue growth. And veteran managers run them.
These firms are showing others how to thrive, even in tough times. And when the market for initial public offerings returns, they are expected to lead the pack. USA TODAY's Edward Iwata in San Francisco looks at the big bets that venture capitalists, who invest funds from wealthy investors and institutions, are making and why.
Sigma Networks
Even as the telecommunications market crashed, Sigma persuaded investors in February to pour nearly a half-billion dollars into the San Jose, Calif.-based firm — one of the first to sell broadband network links to Internet and telecom firms.
How did Sigma do it? It didn't hurt to sign on executives with powerful telecom and Internet ties. Former Federal Communications Commission chairman Reed Hundt and Netscape Communications co-founder Marc Andreessen, both on Sigma's board, gave instant credibility to the start-up.
Two-year-old Sigma sells high-speed, fiber-optic networks that link the Internet to computer networks of businesses in urban areas. That helps firms fill in gaps or shortfalls in telecom networks.
During tough economic times, Sigma's services hold great appeal for cash-strapped telecom and Internet firms who cannot build out or improve networks, analysts say. The market for Sigma's business is projected to grow to $10 billion by 2005. That's up from $2 billion this year, Sigma CEO John Peters says.
When the tech-heavy Nasdaq composite index crashed last year, Peters, 53, didn't panic. The Navy veteran ran computers on a cruiser during the Vietnam War, and he's been an executive at six startups, most recently Concentric Network.
Peters didn't want to repeat the errors of dot-com and telecom firms that grew too quickly. So he shrank his original plan to raise $2 billion and move into 40 U.S. markets. Sigma aimed for $500 million in funding and will target five markets this year. So far, the 50-worker firm has rolled out a network in Washington, D.C. "They're keeping their business model real tight," says analyst Mark Langner at Epoch Partners.
Investors liked what they saw. Sigma got $150 million in venture money last March from Frontenac, Oak Investment Partners and others. About $290 million in loans from Cisco Systems and others should keep Sigma running for 18 months. Peters wouldn't say when he expects Sigma to turn a profit. Sigma also has signed deals with AOL Time Warner, Cable & Wireless and other telecom and Internet giants, adds Andy Rachleff of Benchmark Partners, a lead investor.
"We're moving conservatively in a high-risk field," says Peters, a Stanford MBA who rides Harley-Davidson motorcycles when he isn't cutting deals. "We've learned from the mistakes of others."
Sanrise Group
The explosion of Internet data and complex computer storage systems is driving businesses batty. Sanrise CEO David Schneider estimates there are at least 58,000 possible permutations of hardware and software products and protocols to store information.
Downturn or not, companies are crying for help, and investors see an opportunity. Last month, Sanrise — touted as a simple, one-stop solution to data-storage chaos — raised $115 million in venture funding from Crosspoint Venture Partners, Morgan Stanley, Exodus Communications and others.
Imitating Dell Computer's model of selling built-to-order PCs directly to customers, the Dublin, Calif.-based Sanrise offers data-storage equipment that is preconfigured and shipped to corporations worldwide within 30 days. The model saves customers 30% to 40% in storage costs and spares them from dealing with storage systems that may take months for delivery and setup.
"Sanrise has put together all the pieces of the puzzle into a very customer-friendly package," says analyst David Wilson of the Aberdeen Group.
Sanrise and its 250 employees — including executives from AT&T, IBM and Cisco Systems — are gaining momentum. The company has 600 customers, including Fidelity Investments and General Electric, and it has moved into Europe and Japan.
Schneider predicts revenue of $39 million this year and $94 million in 2002. Profitability? Sometime next year, he says. When the IPO market rebounds, he hopes to go public. "This is just the beginning," Schneider says.
Perlegen Sciences
A decade ago, Perlegen Sciences CEO Brad Margus, 40, was a Harvard MBA running a thriving food-processing firm in Florida. Then his two boys were diagnosed with a fatal genetic disease called A-T, or ataxia-telangiectasia.
It's too late to cure his boys. But Margus' passion to find a cure for genetic ills has led him to raise millions of dollars for medical research — and to head Perlegen Sciences, a biotech firm in Santa Clara, Calif., with top researchers from Stanford University and the University of California at Berkeley.
Perlegen will scan the chromosomes of 50 people and build a vast database to help pharmaceutical and biotechnology firms devise drugs and diagnostic tests.
Perlegen raked in $100 million in April from investors such as Alejandro Zaffaroni, who has founded seven startups, including Alza, a $2 billion pharmaceutical firm. "He's a money-maker who's done it again and again," says John McCamant of the Medical Technology Stock Letter.
It also helped to have a world-class executive and director lineup, including Perlegen co-founder David Cox, former co-director of Stanford Human Genome Center, and Paul Berg, a Nobel Prize-winning cancer researcher at Stanford's School of Medicine.
Another plus: Perlegen was a spinoff of Affymetrix, a firm that makes microchips used to study genes. The close tie helped Perlegen buy $100 million of Affymetrix technology, giving Perlegen ammo against rivals Gene Logic and Celera Genomics Group in genomics, a potential multibillion-dollar industry. Affymetrix owns 45% of Perlegen.
Margus says Perlegen's cash will last 18 months, and he declined to predict when the firm would be profitable. He said the firm, with 48 employees, hopes to go public in a year or two. "Investors are always looking for solid technology and companies with solid valuations."
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