VCs put up just $3.7 billion in the second quarter of 2009 -- less than half the amount they invested during the same period in 2008. But that doesn't mean investors aren't still out hunting for great companies.
So what are they looking for? We asked a panel of venture capital investors to review the 2009 Inc. 500. Invariably, they were drawn to companies with potential for rapid growth, high revenue per employee, and a diversified customer base. "The bar for investing in a company is higher, but the process hasn't changed," says Adam Grosser, a partner at Foundation Capital, a Menlo Park, California, VC firm with $3 billion under management. Here are five companies our panelists especially liked:
2008 revenue: $21.4 million
The panel was unanimous in its approval of Kiva, which makes warehouse robots that help pack and ship products. "It's one of the truly new and innovative products in warehouse management," says Theresia Gouw Ranzetta of Accel Partners in Palo Alto, California. Gouw Ranzetta's firm, which led the initial venture capital investment in Facebook, has also backed another 2009 Inc. 500 company, Diapers.com, which purchased a Kiva system to help manage its rapid growth. "Anybody that does e-commerce knows Kiva," Gouw Ranzetta says.
Park City, Utah
2008 revenue: $85.5 million
Frank X. Dalton, a partner at the Atlanta-based private equity firm Fulcrum Ventures, is drawn to the potential of Skullcandy's stylish headphones and music accessories. "There are so many MP3 players and cell phones being sold right now that the accessory markets are going to get pulled right along with them," says Dalton. "Consumer products businesses usually need a lot of money, but when you hit it big, it's a home run." Dalton also liked Skullcandy's $1.5 million revenue-per-employee figure and that the company, founded in 2003, is relatively young.
2008 revenue: $82.2 million
Corporate cutbacks have made life tough for most business-to-business companies, but Accel's Gouw Ranzetta likes Centro, which sells an online advertising platform to ad agencies. "They're helping people do a smarter job placing ads, which is the kind of ROI play that companies will pay for in this economy," she says. Accel wouldn't touch any companies dealing with traditional advertising, Gouw Ranzetta adds, but online advertising is an attractive business -- provided the company has a reasonably diversified customer base.
2008 revenue: $4.6 million
Outskirts Press, a publishing service for do-it-yourself authors, would seem to be an unlikely candidate for venture capital funding, but that didn't stop Foundation Capital's Grosser from expressing his admiration. "I love the conceit of the company," he says. "Blogs and wikis have made it easy for people to get their views out there, but if you have something long to say -- like a play or a book -- then it's incredibly hard." Grosser concedes Outskirts is in an out-of-favor industry, but he says the publishing angle might actually endear it to a wealthy angel investor.
2008 revenue: $25.9 million
Enalasys makes software that helps companies and government agencies manage their air-conditioning systems more efficiently -- an attractive proposition amid volatile energy prices. "This is the sort of company in our sweet spot," says Grosser, who is looking for green energy companies that don't require $100 million power plants or huge research budgets. He likes the fact that Enalasys produces revenue of more than $600,000 per employee, which suggests good growth potential. Its location along the U.S.-Mexico border also intrigues Grosser. "The fact that they could build a $26 million company in Calexico caught my eye," he says. "The worst case if I go meet them is that I'll have a great taco."