Venture funding tightening up, especially for startup firms: investors seeking faster returns.

Most won't admit it, but venture capitalists are getting more cautious in the types of investments they make.

Many are saying that the lackluster economy has little to do with this trend.

"In general, the venture community has become more cautious," said Robert Kibble, managing partner of San Diego-based Mission Ventures. "People are a lot less forgiving today" if a company doesn't meet prescribed goals called milestones, he said.

Carl Eibl, managing director of Enterprise Partners Venture Capital, the area's largest venture firm with about $700 million under management, says one of the consequences of the sour economy is a reluctance to invest in startups.

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"As a general matter, in a difficult economy, people are reluctant to start new things," he said.

About two years ago, Enterprise had about 50 companies it was investing in. Today, the number has shrunk to 33, primarily later stage firms that are four to five years old, Eibl says.

Simple Strategy

Some of those culled were shut down, others were sold, but the process hasn't changed that much. The strategy has always been to support the ones that are on track and dump those that aren't, Eibl says.

Some venture firms are deciding to seek out buyers for those companies that aren't meeting expectations, rather than increasing their investments, says Brian Sagi, chief executive officer of Cerian Technology Ventures LLC, a local technology advisory firm.

"(VCs) are deciding it's better to sell the company versus raising more funding, either because the funding is not available or it is available at unfair terms."

Venture capital firms generally receive equity stakes in the companies in return for investing millions of dollars to support the development and operations of a startup. The investors get paid off in a "liquidity event" that usually involves the company going public or being sold to an acquirer.

In April, a Mission Ventures-backed firm, Vativ Technologies Inc. of San Diego, was sold to Entropic Communications Inc., a local telecommunications firm, for $5.9 million in cash.

The deal resulted in a loss to Mission investors, but Kibble declined to reveal the amount of its investment. In three rounds, Vativ obtained $37 million through the end of 2006, including investments from Intel Capital, Redpoint Ventures and the Viterbi Group.

"Vativ didn't meet its business plan goals." Kibble said.

More Pressure

Venture firms are also under increased pressure from investors to ensure returns on their money, fund managers say.

"The biotech industry today is tinder considerable pressure to deliver profits to our institutional investors and the current market conditions are not helping those situations," said Stan Fleming, managing member of Forward Ventures, which has about $450 million invested in 22 life sciences companies.

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The strategy for cashing out of venture investments has changed considerably in recent years, say VC managers. In the past, almost everyone focused on taking a company public, but today, reaching a point where a business is acquired by a larger entity is the goal.

"The U.S. equity capital markets have been a lot less robust for venture-backed companies for a long time now," said Jim Ingraham, partner with Pricewaterhouse Coopers in San Diego. "The IPO markets have dried up. If you want to make some dough, you have to do an M&A (merger and acquisition) transaction."

Speed Matters

Meanwhile. investors into venture funds are seeking faster turnarounds on their investments.

Neil Senturia, chief executive at Blackbird Ventures, a smaller firm that makes investments averaging $500,000 to $1 million in startup companies, says that in the past, the time frame to get a company to a liquidation point was five to seven years, but today it's a lot shorter.

"People don't want to hang around that long anymore," he said.

Kevin Carroll, executive director for the AeA San Diego Council, a technology trade group, says he hasn't seen any mass exodus of venture firms pulling out of investing in local high-tech startups. But more companies are having a tougher time securing VC funding, he says.

"The funding environment is probably more difficult for companies seeking add-on rounds of financing," Carroll said. "Will some companies go out of business? Sure, but a lot of others will also focus more on growing their revenue, and just won't scale up as quickly."

Tough Year for IPOs

The number of initial public offerings in the U.S. declined 74.5 percent this year, as of Aug. 6, compared with the same period in 2007.

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