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"Following the Money Trail"
November 29, 2000
By George Avalos

The East Bay is beginning to see an influx of venture capitalists as the tech industry in this region prospers

More private investors want to put their gold in them thar East Bay startups.

A growing number of venture capital companies have begun to open head offices in the East Bay. Collectively, they are ready to bet millions of dollars that Alameda and Contra Costa counties will prove fertile nesting grounds for strong companies of the future.

Here's the reasoning behind the recent uptick in interest in the region. PeopleSoft Inc., Commerce One, Sybase Inc., Documentum Inc., Tut Systems Inc., Ask Jeeves Inc. and Intraware Inc. are just some of the home-grown companies with their original roots and current headquarters in the East Bay.

These companies all started out as corporate nobodies. Over the years, though, they have blossomed into important players in their respective arenas.

Mindful of some of the high-tech and biotech companies in Alameda and Contra Costa counties, private financiers hope to find the next dynamo-in-waiting.

"We have decided to hang our hat in this area and build a portfolio," said Michael Lee, managing general partner with Dominion Ventures, a venture capitalist that opened its head offices in Walnut Creek in April. "We are looking to really step into this area and make a pretty good financial commitment and time commitment to the East Bay."

The center of gravity for the venture capital community is Silicon Valley, specifically the Sand Hill Road district of Menlo Park, not far from Stanford University. A smaller nexus exists in San Francisco, catering to the multimedia and dot-com startups in the Bay Area.

Yet as any map will verify, the East Bay is dozens of miles from Sand Hill Road, the world's center for private financing. But that distance, along with the hills and bridges that intervene, doesn't cause investment executives such as Todd Walchek, managing general partner with Danville-based Integrity Partners, to fret.

"We have a great network of contacts, and it really doesn't matter where you are," Walchek said. "It doesn't hurt us not to be on Sand Hill." Venture capitalists that make the right call on an emerging company can harvest a bumper crop of profits when the company goes public through an initial stock sale, or is sold.

By opening offices in the area, they figure they might be able to prospect for corporate nuggets that other venture capitalists located in Silicon Valley or other financing hubs have overlooked.

"The money is following the opportunity," said Roger Strauch, chairman of the Roda Group, a Berkeley-based VC company. "People used to be pretty snobby about Silicon Valley being a better place to work. That's changing."

Although Walchek says location isn't essential, the venture capital companies that have planted stakes in the East Bay nevertheless believe there are advantages to the location.

"If money is being attracted to the East Bay, those investors clearly have the intention of funding companies that would be located out there," said Tim Bajarin, president of Creative Strategies, a Silicon Valley market researcher.

Besides Dominion, Roda and Integrity, other venture capital firms in the area include Stewart Schuster's company in Walnut Creek and Whitestone & Bluerock Ventures in San Ramon.

Some VC executives also believe the East Bay is an easier place for recruiting management and engineers for the startups they are attempting to bankroll and form.

Here's why this is important, according to some venture capitalists: No people, no company.

"It's one thing to have a really good business plan and a really good technology idea, but that's just the beginning of the journey," Lee said. "It takes people to execute those plans. Real estate talks about location, location, location. In the venture world, it's people, people, people."

VC executives believe finding the right people is becoming steadily tougher in Silicon Valley, especially for startup companies.

"Our portfolio companies were having an incredibly hard time finding space to grow into," Lee said. "The ability to recruit people to work in the East Bay is unbelievably easier compared with Silicon Valley. There's room to grow here, and home prices are less."

With high-tech competition among companies in constant flux, and with the high-tech world moving at what's called "Internet speed," time is a crucial factor in getting a fledgling firm ready to hit the ground running.

"We can add 30 or 40 programmers to a company here in the East Bay much more quickly than in Silicon Valley," Lee said.

One venture capitalist in Silicon Valley agrees that the South Bay is being seen as a less attractive area for launching startup companies, especially because home prices have skyrocketed and traffic has swelled.

"The infrastructure in Silicon Valley is being pushed to the max," said Doug Barry, a general partner with Selby Venture Partners in Menlo Park.

"Anybody who can foster the growth of venture capital in the East Bay could be making a good move."

At first glance, it might seem that the East Bay isn't much of a hotbed for technology executives and engineers. But the mega-boom of companies that started small and are now high-tech landmarks in the region has created a group of workers who can prosper as the core team to launch a startup. The next PeopleSoft or future Commerce One might be seeded by employees from those big companies.

There's tons of talent over here," Walchek said. "We have as much talent here as they have in Silicon Valley. Plus, people love living over here."

Executives with some East Bay startups like the increased attention. They believe the presence of more private financiers who have committed resources directly to the region definitely has the potential to enrich the coffers of fledgling companies with a great idea but a shortage of funds.

"It absolutely helps," said Tom Glassanos, president and chief executive officer at Pleasanton-based Xign Corp., an Internet electronic-payments company. "This proves the viability and the growth of the entrepreneurs on this side of the Bay. The venture community is beginning to realize the East Bay has critical mass today."

The appearance of more venture capitalists in the area can also be an important convenience for the entrepreneurs locally, said Matthew Leek, president and founder of Thin Disc Media Inc., a Pleasanton-based high-tech firm.

"Rather than have to toddle off to Silicon Valley or Sand Hill Road, companies here could make contact with venture capitalists here," Leek said. "With VC companies over here, they will want to keep an eye on their investments here. It's a recognition that the technology business is swinging over to this corridor."

The VC expansion in the region received a boost in late October with a meeting in Concord of the Golden State Capital Network. A number of venture capitalists, along with officials from private companies, attended the two-day event, which had as its motto, "Blazing trails to the 21st Century Gold Rush."

But the gathering also may have served as a bit of an eye-opener for VC officials who might not have been aware of the area's potential. The conference was presented by the Forum for Women Entrepreneurs, Bay Area Regional Technology Alliance, Greenhouse for Startups, Software Development Forum, Berkeley Entrepreneurs Forum and National Venture Capital Association.

At the conference, private companies were able to hear from venture capitalists about what it takes to get funded. The entrepreneurs also had the opportunity to meet potential financiers face-to-face.

"The East Bay is an under-served market," said Matt Bolton, an analyst with Woodside Fund, a Redwood Shores-based venture capitalist. "The quality of investment opportunities out here is fantastic."

Bolton speaks from experience. He's a board member with the Contra Costa Software Incubator, a Concord organization that has nurtured the early stages of some high-tech companies. "That's been a very good relationship for us," Bolton said.

Without question, Silicon Valley has emerged as the world's principal nexus for technology and venture investing.

Silicon Valley has Stanford University and San Jose State University as the technology-oriented educational drivers for the area, and it has the NASA Ames Research Center as a scientific and government impetus.

Technology leaders such as Intel Corp. and Cisco Systems Inc. provide a pool of executives who could provide the cadre for a startup.

Yet some of those elements exist in the East Bay.

UC Berkeley is a leader in technology breakthroughs, including some crucial research related to how the Internet works. Cal State Hayward has increased its technology-education offerings. And the Lawrence Livermore Laboratory and Sandia National Laboratories have supplemented their nuclear weapons development with research into a number of crucial high-tech sectors, including computer chips, software and super-computers.

"Silicon Valley doesn't have to be the only place where this sort of mix can be created," Bolton said.

George Avalos covers technology, telecommunications and the Internet. Reach him at 925-977-8477 or gavalos@cctimes.com



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