Top 10 Northwest Venture Deals of the Third Quarter—and VC Color Commentary

Woe is me, said the VC. With the exit markets all but closed, fundraising in a logjam, and portfolio companies struggling to stay afloat, it is a tough time to be a venture capitalist. Yet the good ones will survive, and thrive. As will the companies they are building.

That’s the message I got from chatting with a few prominent Seattle investors yesterday, after the release of the third-quarter venture stats from the entity that I’ll call MoneyTree / PricewaterhouseCoopers / National Venture Capital Association / Thomson Reuters. Indeed, there were enough interesting investments made in Northwest companies to give local VCs some encouragement (see top 10 list of deals below). In fact, some $242 million was invested in 30 Northwest companies during the third quarter, according to the report. That’s the most dollars invested in a quarter since the third quarter of last year ($280 million in 44 companies).

“For four quarters we’ve had growth. Things are up off the bottom,” said Andy Dale of Buerk Dale Victor. “We’re still a top-five market.” Dale also maintained, as he pointed out last quarter, that 10 or more of the 15 members of the Evergreen Venture Capital Association are actively making investments.

Thomas Hodge of Frazier Technology and Healthcare Ventures is similarly hopeful. Frazier co-led the region’s biggest financing deal of the year, Seattle-based Calypso Medical’s $50 million round announced last month. “As the economy improves, and we’re seeing it already, VCs will put more money to work. We feel that in our gut,” Hodge said. “First-time financings for us aren’t as busy as a year ago, but they’re consistent with national figures.” He added that in the healthcare space, later financing rounds are getting bigger, because it takes even more money to get to profitability now, and there’s “a longer holding period because of volatility in the markets.”

Scott Jacobson of Madrona Venture Group pointed out that in the IT sector, consumer software could be making a comeback—he points to recent investments in companies like Seattle-based Dashwire ($1.2 million) and Bellevue, WA-based Smith & Tinker ($29 million). Jacobson also said performance advertising and IT business software remain promising areas.

On the topic of exits, Hodge pointed out that Seattle-based Omeros’s sinking share price in the wake of its IPO (in the first initial public offering in Washington since 2007) is “a function of the buyers of biotech—those buyers are still risk-averse…We think it’s going to be better next year, but we have to be ready.”

Jacobson agreed that the exit markets will be tough for a while. “Certainly the bar is higher,” he said. “It’s getting healthier, but it’s still somewhat stagnant. It’ll be the companies that are really executing and meeting a real strategic need that get acquired. There are still plenty of companies where there won’t be an exit.” Jacobson added that casual and social gaming is a promising sector for seeing some exits in the coming year.

To sum it up, venture capitalists are feeling “cautious optimism from a company performance and fundraising standpoint,” Jacobson said. Hodge concurred, adding, “It’ll be a slow pace of improvement.”

Here are the top 10 Northwest venture deals of Q3 2009 and their lead investors, according to the MoneyTree report:

1. Calypso Medical (Seattle), $50M, Skyline Ventures and Frazier Healthcare Ventures

2. Smith & Tinker (Bellevue, WA), $29M (total funding), DCM, Alsop Louie Partners, and others

3. ClearEdge Power (Hillsboro, OR), $15M, Applied Ventures

4. PhaseRx (Seattle), $15M, 5AM Ventures, Arch Venture Partners, Versant Ventures

5. Ensequence (Portland, OR), $14.5M, NextPoint Partners, Clay Mathile

6. Apptio (Bellevue, WA), $14M, Andreessen Horowitz, Shasta Ventures, and others

7. Uptake Medical (Seattle), $13M, Arboretum Ventures and others

8. Prometheus Energy (Redmond, WA), $10M, Shell Technology Investments

9. Advanced Inquiry Systems (Hillsboro, OR), $7.3M, Applied Ventures, Intel Capital, and others

10. Qliance (Seattle), $4M, New Atlantic Ventures and Second Avenue Partners

(The above deals don’t count two Seattle-area companies listed in the MoneyTree report as “confidential”—one backed by Ignition Capital ($13M total), the other by Frazier Healthcare and Technology Ventures ($9M total). The list also excludes a Montana company and an Idaho company, which lie outside Xconomy Seattle’s area of focus.)

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