Investors opt for companies with simpler business plans

Investors opt for companies with simpler business plans

By Debora Vrana ~ The Los Angeles Times

Burned by the continuing technology meltdown, more venture capitalists are aiming their investment dollars at companies with business plans that nearly everyone can understand.

It's a trend that helped a number of private Southern California companies get venture funding in the second quarter. Among them: Cerritos-based Aspen Education Group, which runs schools for troubled teens in eight states, and Seal Beach-based GreenPark Group, which buys and develops polluted real estate sites.

"You don't need to have a scientist explain these companies to you,'' said Don Williams, Pacific Southwest venture capital advisory group leader for accounting company Ernst & Young.

Venture funding overall has plummeted over the last two years and continued to slide in the second quarter as investors have become more reluctant to sink money into young companies. In Los Angeles, Orange and San Diego counties, 71 companies got $632 million in venture money in the quarter, according to a survey by PricewaterhouseCoopers and the National Venture Capital Association.

That was the smallest number of Southern California companies funded in any quarter since the third quarter of 1997, and the smallest dollar total invested since the first quarter of 1999. The Southern California data mirror the national trend.

Mostly gone from the roster of companies attracting new venture money are start-up businesses, Internet business-to-business plays and e-commerce anything.

In Southern California, software and medical-related companies continue to lure investment, albeit in smaller numbers. Among the companies that got funding in the latest quarter was Irvine-based Valley Forge Pharmaceuticals Inc., which is developing an eye drop to prevent myopia in children.

Venture capital funds, which pool money from institutions and wealthy investors to invest in private companies, have dramatically scaled back their bets as many young tech companies have collapsed. Also, the stock market's plunge has reduced the likelihood that many private companies can go public any time soon. That closes the door on one of the main routes venture investors use to cash in their stakes in businesses.

In the heady days of the Internet boom, entrepreneurs armed only with dreams managed to secure millions in venture money. In the second quarter, by contrast, just one Southern California start-up company, San Diego-based Rubicon Pharmaceuticals, got funding.

"You need a product and you need real revenues to get funded these days,'' said Randy Churchill, a director of business development with PricewaterhouseCoopers in Los Angeles.

The new environment has steered many venture investors with limited dollars to put to work toward companies with simpler business plans, or encouraged them to fund tech companies in which they already have invested significant sums. Those trends favored Southern California companies such as these in the second quarter:

Founded in 1994, Aspen Education employs 1,200 people, had sales of $72 million last year and is turning a profit on its business of running schools and treatment programs for troubled teens.

More than 8,000 teens attended Aspen's programs last year, the company said. Most of the company's revenue comes from payments made directly by parents, rather than by government agencies.

Aspen's 28-day program in the Blue Ridge Mountains for "parents seeking solace for their struggling child'' costs nearly $11,000. But parents will mortgage homes, borrow from relatives, "do whatever it takes'' to help their children, said Elliot Sainer, 56, the company's chief executive.

"The demand for our programs, unfortunately for society, is growing,'' Sainer said. "There are so many kids in trouble at every end of the economic spectrum.''

Aspen received $15 million in venture money from one source, investment company Warburg Pincus, in the second quarter. The company will use the money to add to its 10 operating residential treatment schools and to make acquisitions, Sainer said.

Aspen could go public in the next five years, he said.

Founded by Johannesburg, South Africa, native Kevin Torf in 1995, Tornado Development has survived the technology sector's implosion.

The El Segundo, Calif., company has a patent pending for software that allows a customer to access all messages--phone, fax and e-mail --in one place.

Tornado raised $20 million in the second quarter from previous venture investors including GE Equity and Intel Corp., bringing the total amount raised since the company's formation to $70 million in five rounds of financing.

To stay alive, the company has kept costs to a minimum and concentrated on its product, Torf said.

At a time when many venture capitalists are cutting the cord to previously funded companies they don't think will make it, keeping investors involved wasn't easy, Torf said. "You can't see my wounds over the phone, but there was a lot of blood,'' he said.

With 60 employees and clients in Malaysia and China, Tornado hopes to attract major U.S. clients soon or find a buyer among the major telecommunications companies, Torf, 40, said.

But the blowup of Global Crossing Ltd., an early investor in the business, has hurt, he said. "That took some food off the table.''

Costa Mesa, Calif.-based U.S. Education Corp., which provides post-secondary education in the health sciences and information technology areas, took in more than $20 million in the quarter from two investors: ClearLight Partners in Newport Beach, Calif., and Chicago-based William Blair Capital Partners.

"We hope to go public in the next two years. It depends on how fast we grow,'' said company president William Clohan.

Formed last year, the company now has 200 employees and plans to use its private equity for expansion. U.S. Education serves 1,800 students through four campuses in Northern California.

"We love this sector. It has great long-term demographic trends with the U.S. economy's demand for a more highly skilled labor force,'' said Rob Healy, a partner with ClearLight.