Quiet Quarter Reported for VC Finance

SOMS Technologies has worked with Advantage Capital Partners for two years through the state’s CAPCO program:

The second quarter was a quiet one for venture capital finance in Westchester, with only several companies reported as tapping into $4.58 million in funding.

More than half of it, $2.65 million, was raised by a single company – SOMS Technologies L.L.C. of Valhalla, according to the quarterly MoneyTree Report released by PricewaterhouseCoopers and the National Venture Capital Association, using data from ThomsonReuters.

SOMS Technologies raised the $2.65 million in a Series A venture round co-led by Advantage Capital Partners and Rand Capital Corp., with several individual investors.

Miles Flamenbaum, CEO of SOMS Technologies, said the capital would help pay for expanded commercialization of the microGreen filters, designed to cut oil use 70 percent compared with conventional filters, and allow for oil changes just once every two years.

“More particularly, it is for working capital requirements, acquisition of inventory, an expansion of our resource base – increasing our customer-phasing activities and our sales activities,” Flamenbaum said.

That expansion would require an expansion of its current work force of three full-time and four part-time employees.

“I would say over the next 12 months, it could be upwards of an additional six to eight positions,” though the exact number has yet to be determined and will depend on market response to the filters and how strongly sales ramp up, Flamenbaum said.

SOMS Technologies was established in 2006 and began selling its microGreen oil filters two years later. The company has raised a total $3.1 million, including earlier angel funding, and does not disclose annual revenues.

Customers include the company’s home municipality, the town of Mount Pleasant, which uses the microGreen filter technology in a variety of vehicles that include police cars, and the city of Oxnard  in Southern California, which tested microGreen for a year before agreeing to adopt the filters for its entire municipal fleet of vehicles. Oxnard announced last month it expects to reduce its annual oil consumption by 24,000 quarts, saving the city $145,000 in oil and labor costs.

Municipalities such as Mount Pleasant and Oxnard account for about 60 percent of SOMS Technologies’ customer base, with the remaining 40 percent consisting of private businesses.

“That’s beginning to change. We’re working with several large companies to get them to convert over to the product, so that balance will start to change,” Flamenbaum said.

Advantage Capital raises venture funds through the state’s Certified Capital Company or CAPCO program, which offers tax incentives for insurance companies doing business in the Empire State to create investment pools of capital that allow for investment in early-stage and expanding companies. SOMS Technologies has worked with Advantage Capital two years, Flamenbaum said.

According to MoneyTree, SOMS Technologies was joined in raising venture capital during the second quarter by an unidentified Westchester company that received about $1.9 million.

MoneyTree also listed $30,000 in capital as going to Flat World Knowledge L.L.C., an Irvington publisher of commercial, openly licensed college textbooks. That funding appears to be a piece of the $8 million Series A round announced last year by lead VC investor Valhalla Partners, with participation by two other firms, Greenhill SAVP and High Peaks Ventures – since the same investors were listed by MoneyTree. Flat World Knowledge spokeswoman Carole Walters said the company had not raised any new funds since February 2009.

This year’s second quarter saw the venture capital market for Westchester companies bounce back from a year ago, when a single company received just $1.2 million in VC during the second quarter of 2009, according to MoneyTree.

Flat World Knowledge and SOMS Technologies illustrate what a VC market tracker for PWC says is one trend in VC financing that has emerged this year: Growing investor interest in early-stage companies despite the weakened economy and financial markets of the past two years.

“There are an awful lot of very smart, very capable people that have come out of large corporations in the current doldrums. And they’re coming forward looking for financing. So you have very good technologies, very good people trying to get something started,” said John Taylor, MoneyTree’s vice president for research. “The opportunities for investments are good. And history has shown that many of the better venture backed investments took place during slow periods.”

Those early-stage companies, Taylor said, would in a typical market be candidates for investors to cash in five, six or seven years out through initial public offerings. Because the IPO market has been very slow, investors are hedging their bets through more early-stage venture capital financings.

Years ago, he said, investors would hold back three times the amounts they invested in early stages for follow-on investments in their companies.

“Now you’re seeing four times, five times being held back, which limits the number of companies they can take on. But it also means they’re expecting a conservative business environment,” Taylor said. “I guess the expression is, they hope for the best but plan for the worst.

Nationwide, MoneyTree recorded 429 venture capital deals involving seed and early-stage financing totaling $2.3 million during the second quarter, compared with 221 such deals totaling $1.5 billion in the second three months of 2009.

Those deals were among what MoneyTree said was a total 906 seed and early-stage VC deals totaling $6.5 billion seen in the second quarter of this year — well above the year-ago quarter totals of 612 deals totaling $3.7 billion. The percentage of seed and early-stage deals rose year-to-year from 36 percent to 47 percent.

DowJones VentureSource, by comparison, tracked a total 744 VC deals totaling $7.7 billion during second quarter 2010, compared with 656 VC deals totaling $6.1 billion the same three month period last year.

Seed and early-stage companies accounted for 32 percent of the VC deals, or 238, and 15 percent of the capital, or almost $1.2 billion, won by startup companies during Q2 2010. Unlike MoneyTree, DJVS’ national results recorded a slight dip in seed and early-stage activity from a year ago, when 35 percent of deals and 19 percent of capital went to such companies.

But in the New York region that includes Westchester, seed and early-stage deals accounted for a sizeable amount of the activity tracked by DowJones VentureSource. Of 24 disclosed New York metro-area companies recorded by DJVS as winning VC funding during the second quarter, 15 were either companies that received first- or second-round funding.

And most of those 24 disclosed companies were in either of two sectors — business-support companies, which accounted for eight deals; and advertising and other consumer information startups, seven deals. The region saw one biopharmaceutical and one medical software company, though both account for significant numbers of deals and capital raised nationwide.

The business-support and consumer info sectors require less funding per startup than biotech or medical device companies heavy with costlier technology, which made them more attractive to investors, said Jessica Canning, DJVS’ global research director.

The region, according to DJVS, saw 85 VC deals for a combined $496.33 million during the second quarter, nearly double the 51 VC deals totaling $346.73 million racked up a year ago.

In the current economy, Canning said, startups are hoarding capital so they can survive on fewer rounds.

“The more uncertain the economic climate, the more money the company tries to raise in each round,” Canning said. “That being said, they may have to last longer between rounds of financing than they previously did. If there is any kind of uncertainty in the market, the company and the investors will try to put as much money into the company as possible.”

“If you don’t know where the economy’s going to be in nine months from now, you want to make sure to give them enough capital to get them through any kind of changes in the economy that may hurt their growth targets,” she said.

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