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5 Venture Capital Firms, $5.3 Billion To Invest
By Victor Godinez / The Dallas Morning News

DALLAS, Texas | April 30, 2022  
For the cadre of venture investors who gaze out on Dallas from the 16th Floor of Two Galleria Tower, it's clear that the local investment landscape has changed.
The telecom boom and subsequent bust have washed over the region, leaving behind an uncertain future as Austin now attracts more new venture investing than Dallas.

But from a cluster of offices and cubicles remarkable only for their eagle-eye view of the city, these investors are doling out billions of dollars that could spark the rebirth of Dallas' high-tech economy.

They see a market where raising venture money has proved surprisingly easy, while their own decisions are more carefully calibrated than ever.

And they say that even as once-hot telecom hardware companies have cooled, the makers of telecom software especially wireless are sizzling.

"All of us have raised or are raising funds, and it was the easiest that I have ever seen," said Berry Cash, general partner with InterWest Partners. "We raised less money, and we had more people throwing money at us. We raised $600 million, and we could have easily closed a billion or more."

InterWest's big-name VC neighbors include Sevin Rose Funds and CenterPoint Ventures. The concentration of these firms has made the "16th Floor" an instantly recognizable proper noun in certain Dallas business circles.

The three companies recently sat down with several Dallas Morning News reporters in a conference room in their lofty offices to talk about the history of the 16th Floor, trends in venture fund raising and where the firms are investing their money now.

STAR Ventures and HO2 Partners are also part of the 16th Floor.
The executives said that although they all collaborate frequently, sharing tips on investment opportunities and taking advantage of each person's expertise, they don't invest in lockstep.

"When people come up here, they think that there's a cartel up here that all invests together, and that is not true," said Jackie Kimzey, general partner with Sevin Rosen. "There is very little overlap. We all make our own decisions."

Those decisions are being greased by a surprisingly steady flow of money from investors looking to tap into the hot world of venture investing.

Mr. Cash said venture-backed companies, especially telecom start-ups and dot-com firms, were hammered after the bubble burst in late 2000 and early 2001.

"So everybody thought, 'Oh, man, we've got to raise some more money in '04 and '05, and it's going to be really hard,' " Mr. Cash said. "It's not."

Last year, venture capital firms in the United States invested $21 billion in young companies.

But venture firms are being handed money just as fast as they invest what

they've already got.

In the first quarter of this year, U.S. venture companies raised $5.3 billion, up from $2.7 billion in the first quarter of 2004.

Mr. Cash and others at the meeting said there are several reasons for the surplus of cash.

Venture capital investing has become as mainstream as buying stocks or any other form of investment, they said. Many cautious investors who missed out on the venture boom of the late 1990s albeit temporary don't want to be left holding the bag a second time.

But venture firms are trying to be more analytical when it comes to picking the companies to invest in.

During the boom, wishful estimates of the rate of growth of Internet traffic and the technological leap from copper wire-based telecom equipment to fiber-optic equipment spurred a disastrous overinvestment in telecom hardware companies.

The rush to upgrade before the Y2K deadline didn't encourage clear-headed investing, either.

"For the guys and gals in this room, that was the storm we went through," Mr. Cash said. "Ironically, there was another storm stacked on top of it that was also part of the bubble, and that was the dot-com deals."

Avoiding dot-coms

Fortunately, he said, the 16th Floor largely shied away from dot-coms.

"When came up here to try to raise money, we sat there and said, 'Why would I want to buy my garden hose over the Internet?' " Mr. Cash said. "Why is that a good thing? It's not. So they didn't get funded here. They got funded in Austin."

"So we didn't do what I call dumb-ass dot-com deals," he said.

"We did dumb-ass telecom deals," shot back Terry Rock, general partner with CenterPoint.

Laughter filled the crowded conference room.

Telecom equipment maker Chorum Technologies Inc. of Richardson, for example, received more than $200 million in venture funding, a significant portion from the 16th Floor, before shutting down.

One consensus from the venture investors was that traditional telecom hardware companies that make products like network switches are not hot anymore. But companies that create telecommunications software particularly wireless software are smoking.

"The part of telephony that is robust and is growing and there are start-ups and there is activity here in Dallas is the wireless world," Mr. Cash said.

"It's difficult to sort out exactly where the best opportunities are there, but we're not without problems to be solved."

It's not just software firms creating applications for cellphones that are attracting investments.

"I looked at a company last week and you may laugh but it's a real-life example of this," said Dave McLean, Sevin Rosen general partner. "It's a company that's deploying wireless sensor networks for vineyards, and they monitor temperature, humidity, sugar content."

Inexpensive wireless sensors planted in the vineyard transmit data to a central location.

If the grapes aren't in the best location to catch the sunlight, a trellis can be adjusted remotely, like an electronic sunflower.

"The viticulturalist can be out there managing, with your notebook computer, logged in to a Web portal, your 10,000 acres of Beringer and Gallo, which is what these guys are doing," Mr. McLean said.

Unknown factors

The 16th Floor firms have invested in many start-ups that became familiar names: Compaq, Electronic Arts, Silicon Graphics, Cyrix.

Many more of the best performers in their portfolios are unknown to the general public, as larger firms acquired them before they ever became public companies.

Many of the founders of the 16th Floor companies go back to Mostek Corp., a Dallas semiconductor company that went out of business in the early 1980s.

Mostek executive L.J. Sevin and Benjamin Rosen founded Sevin Rosen.

"So L.J. and Ben Rosen founded Sevin Rosen in 1981, and I started a little fund here in 1983 and later joined InterWest," said Mr. Cash, who also worked at Mostek. "But L.J. and I were both doing deals, and he was officing up in the Quorum and I had an office over in the other tower. His lease ran out, and for whatever reason they moved onto this floor."

"Then my lease ran out and he had some extra space, so I moved over here," he said.

CenterPoint's managing general partner Robert Paluck was also a vice president at Mostek.

Despite the fact that all three of the major 16th Floor venture firms have ties to Mostek, they operate independently, Mr. Rock said.

"These guys aren't telling you a story about the way we invest, because it is about one and a half deals per partner per year," he said. "And each one of us sees things a little differently, as you might expect. So our portfolio overlap is about 30 percent."

It's an unusual model, said InterWest partner Ron Nash, but it has been used before.

"If you look at a historical analogy for this, the one I always use is Lloyds of London," he said. "A couple hundred years ago, that was not a company. It was a building where a bunch of insurance brokers sat."

"When a ship captain wanted to insure his ship before it went out on this dangerous journey, no one insurance broker could insure and carry all the risk," Mr. Nash added. "So they became syndicated. But they all just sat in this place called Lloyds. It wasn't one company. They made individual decisions."

The next boom?

Through boom and bust, that approach has worked for the investors on the 16th Floor.

Now everyone's waiting to see if there's another boom on the way.

"I think what everybody was questioning was, 'Is there going to be life after the telecom bubble?' " said Joe Bass, president and chief executive at Richardson-based Covaro Networks, one of the few local telecom equipment makers to be funded by Sevin Rosen, InterWest and CenterPoint. "I will tell you that there's strong innovation. We're seeing a lot of deals."

"The problem that I think we're having in this community is that there's not a lot of deals coming out of Dallas, Texas," he said. "The other entrepreneurial centers are far more active."

He said venture investors are focusing more heavily on Austin.

Last year, Austin companies received nearly $540 million in venture investment, compared with $321 million in Dallas, said the National Venture Capital Association; that gap grew in the first quarter.

Michael Cation, chief executive officer at Austin start-up NovusEdge, which was funded by Sevin Rosen and InterWest, said via conference call at the meeting that wireless networks and software are the next wave of hot technology for companies like his to pursue.

He cited radio frequency identification technology of which Dallas is the epicenter, thanks largely to Wal-Mart Stores Inc.'s tests as one of the biggest emerging technologies.

"You're going to see the world of smart telecommunications impacting a bunch of traditional industries," he said. "You'll see this phenomenon in physical security. You'll see it in building control. You'll see it in the supply chain. You'll see it in industrial controls and data systems."

"Those are very large global markets that will be profoundly changed, because they're going to become connected," Mr. Cation said.


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