Nat Goldhaber wants to find the next promising technology startup. He says he’s more likely to discover it among the chalkboards of Berkeley than the whiteboards of Silicon Valley.
Goldhaber, managing director of venture-capital firm Claremont Creek Ventures, holds office hours once a month at the University of California, Berkeley, and has set up an incubator at its office in a historic building in nearby downtown Oakland that features a 120-foot-tall, gold-trimmed glass dome.
“When we find companies at UC Berkeley, we typically go to the laboratories and work directly with the professors and graduate students,” Goldhaber said. “Some of them have incubated inside our physical facilities.”
Claremont, with $300 million in capital under management, targets entrepreneurs still in school because it invests exclusively in companies at their earliest stages. That’s unusual in the venture-capital industry, which in recent years has concentrated on relatively mature startups that are considered less risky.
Seed and early-stage investing dropped 30 percent to $1.4 billion in the first quarter from the previous period, according to the National Venture Capital Association, an industry trade group. The number of companies receiving that funding slipped 24 percent to 299 from the previous quarter.
Venture capitalists are “really looking to be associated with successful exits,” said Robert Ackerman, founder and managing director of Allegis Capital in Palo Alto, California. “Strategies are drifting to supporting investments that previously you never would have thought of as a venture investment.”
Still, Claremont’s approach has paid off. Its biggest success so far has been PropertyBridge Inc., an electronic payment-processing company that was acquired by MoneyGram International Inc. in September 2007. Terms of the deal weren’t disclosed, though Goldhaber said his firm received five times its investment from the sale.
Another one of Claremont’s portfolio companies, Adura Technologies Inc., which makes a wireless lighting-control system for office buildings, has raised $17 million, hired 35 employees and secured dozens of customers including Google Inc. The founders first met with Claremont in 2005, when they were still students at Berkeley’s Haas School of Business, and received funding in 2008.
Shoebox of Equipment
“What we showed them was a shoebox worth of equipment,” said Zach Gentry, chief strategy officer and co-founder of Adura, about his first meeting with Claremont. “We told them basically, ‘Here’s what we think we can do, here’s where we think the market is going.’ What we need to do is get the money to make this a viable concern.”
Gentry recalled that “Claremont Creek had a reputation in Berkeley circles as one of the few VCs that was primarily looking at ventures that were coming out of UC Berkeley.”
Not every startup works out. Claremont typically consults with a company for six months to a year before deciding to invest, Goldhaber said. About a third of those companies don’t end up with a deal in the end.
“The really principal issue is whether the entrepreneur will listen,” he said. “Sometimes you get someone who is just bloody stubborn and doesn’t want to listen at all and thinks that they know best. Generally speaking, they don’t.”
Venture capital firms typically hold a company in their portfolios for several years and make a profit when the business sells shares to the public or is acquired. The recession made that more difficult, said Emily Mendell, vice president of strategic affairs for the National Venture Capital Association.
“In 2008 and 2009, the market for IPOs was in the toilet,” Mendell said, referring to initial public offerings. “Very few companies were able to get out and go public.” The acquisitions market “was not much better,” she added.
IPOs declined 61 percent in 2008 from the previous year, according to Bloomberg data. The number of offerings dropped again in 2009, by 11 percent.
“When the companies can’t exit the portfolio, there’s less money and less time -- because, remember, these VCs put in time -- to invest in new companies,” Mendell said.
The IPO market began to recover this year, with 101 companies announcing a stock sale so far in 2010, more than six times as many as in the same period last year.
Claremont held on to its incubating companies as it adds more to the mix. The most recent investment is in Alphabet Energy, which developed a technology that generates electricity from excess heat created during metals refining and cement and glass production. Alphabet said on May 3 that it had received $1 million from Claremont and the nonprofit CalCEF Clean Energy Angel Fund.
“They had a hands-on approach even before we had an investment,” Chief Executive Officer Matthew Scullin said of Claremont.
Goldhaber agrees that oversight is crucial.
“I keep wanting to say ‘adult supervision’ but that’s too snotty,” he said. “They have had the advantage of a steady hand, right from the beginning.”