BY DAVID SPEAKMAN

Good news for EM Capital Inc. is bad news for the economy.

The San Francisco-based consultancy is one of those companies called in by creditors, courts and boards of directors to advise and restructure companies in financial peril.

“Our specialization and expertise is in extremely high demand now,” says Seth Freeman, EM’s CEO. “We are, in that sense, counter-cyclical. In many ways the worse the economy is, the more we’re needed.”

He expects business to be two or three times better than last year when it grew by 50 percent. EM Capital has 22 employees and partners in North America, Europe, Asia and Latin America. The company opened a Detroit office four months ago and plans a Miami office by September to focus on the downturn in the hospitality industry and serve as a gateway to its Latin American operations.

Bill Tulin, a San Jose partner at Ernst & Young Group Ltd., which also advises restructuring companies, says the economy is a factor, but a new federal law also plays a role in the rise in restructuring activity. The Sarbanes-Oxley Act of 2002 requires company officials to take legal responsibility for their company’s accounting practices.

“So part of it is the economy and part of it is that in the past controls were not put in place,” Tulin says. “People are just more aware, much more concerned. If nothing else, it’s that now the CFO and CEO will have to certify the accuracy of their financial statements.”

That new accountability may be the final straw for some creditors and boards of directors who increasingly call upon restructuring firms to rescue their troubled charges.

“Companies and stakeholders are finally being pressed to make decisions,” EM Capital’s Freeman says.”It’s funny, people tend to lose their shirt and spend a lot of energy avoiding [the] remorse of admitting the need for help.”

Tulin says since Sarbanes-Oxley became the law, companies are forced into action.

“The ball game has changed dramatically,” Tulin says. “I think this is one of those times where federal regulation is producing some good things. There is no question about it.”

BY DAVID SPEAKMAN

In a move similar to homeowners refinancing mortgages for lower loan rates, Greater Bay Bancorp of Palo Alto recently floated $150 million worth of five-year senior notes to raise cash.

Greater Bay says the strategy is cost effective and takes advantage of lower interest rates.

“The $150 million was really a replacement of some zero-coupon bonds that we issued back in April of last year that we were able to retire at a discount during 2002,” says Greater Bay CFO Steven Smith. “So the new funds will be used for liquidity purposes at the holding company.”

Led by Keefe, Bruyette & Woods Inc. of New York, the notes bear a fixed annual rate of 5.25 percent with interest paid every six months starting Sept. 30. The notes mature May 31, 2008 and cannot be called for early cash out.

Smith said Greater Bay will most likely invest the money in securities that can be cashed in when needed for future expenses.

“Being a holding company with 11 banks, you need to have some excess liquidity capacity,” Smith says. “So we’re doing it for stability and it also gives us extra cash should there be any small acquisition opportunities.”

But with the tough economy and the Federal Reserve putting pressure on net interest margins, Smith says his company is not looking into buying other banks.

That follows the general trend in California of few acquisitions in banking because of unrealistic price expectations of potential sellers, according to new research by RBC Dain Rauscher Inc. of San Francisco, which looked at the California banking industry during the past few weeks.

RBC analyst Joe Morford said despite Greater Bay’s exposure to a weakened commercial real-estate market, credit trends in its portfolio remain healthy.

“Not only is this portfolio well-diversified … more than two-thirds of the loans have personal guarantees,” Morford said. Research predicts it will take up to 10 years for all the vacant office space in the Bay Area to be leased. Morford also praised the recent $150 million note sale as helping Greater Bay’s debt restructuring efforts.

South Bay banks cater to growing Asian immigrant population

BY DAVID SPEAKMAN

As the makeup of the South Bay population continues to change, some banks are taking advantage of emerging niche markets by serving the area’s Asian immigrants.

In recent years, smaller banks focused primarily on immigrant populations have either started or opened branches in the area, including Asiana bank in Sunnyvale, Summit National Bank in San Jose and Far East National Bank in San Jose.

Even traditional business lender Bridge Bank N.A. of Santa Clara included outreach to the region’s burgeoning Asian population when it was founded in 2001.

“We expected that somewhere in the neighborhood of 5 percent of our business might be focused in that kind of a niche,” says Thomas Sa, Bridge Bank’s CFO. “At this point, I believe we accomplished it.”

While Bridge, Wells Fargo & Co. of San Francisco and Bank of America Corp. of Charlotte, N.C., have local outreach programs to Asian immigrant business owners, who comprise less than 10 percent of their business, banks such as Summit, Far East and Asiana see that market as their primary business.

Sa says a major part of Bridge’s outreach program was import-export funding, which was hit hard by the recession.

“The export business, and technology business specifically, have been one of the more impacted areas of the economy,” Sa says. “I think it’s probably less of a focus today than we anticipated. But we expect that when the economy comes back, we’ll find ourselves refocusing.”

Another South Bay lender isn’t waiting for a recovery.

“Of course the economy out there is not great for expanding, but we believe the opportunity is ripe now for us,” says Gary McClung, CFO of Atlanta-based Summit Bank Corp., which has four branches in Atlanta and one on Tully Road in San Jose.

By July, Summit plans to open a branch in Fremont at the intersection of Mission and Warm Springs boulevards.

“It’s a vibrant area for small business,” says McClung. “It’s a major crossroads with a very large Asian population in a
3- to 5-mile radius.”

So far the strategy of attracting a largely Asian business clientele has been paying off for Summit (Nasdaq: SBGA) as the company reported a per-share profit of 30 cents in its fourth quarter ended Dec. 31 — up from 17 cents per share in the fourth quarter of 2001.

In Atlanta, Summit focuses on Chinese, Indian and German immigrants. The South Bay operations started with the 1998 acquisition California Security Bank, which catered to San Jose’s large Vietnamese population. But since the Summit buyout, the bank has been expanding its focus to other Asian ethnicities as well.

Craig Woker, banking analyst for Morningstar Inc., says niche banking to non-English speaking clients can pay off.

“It’s a business model that certainly happens with small banks located in a community where there is a large immigrant population,” says Woker from his Chicago office. “But it is mimicked to some degree by large banks when they do operate a branch in a neighborhood that is dominated by immigrants. Obviously any bank is going to try to appeal to and serve its local customers.”

McClung says Summit is interested in possible expansion to Milpitas and Cupertino, cities with a large population of Chinese, Korean and Indian entrepreneurs.

“We went to Summit Bank because we were new to business and after we’d been turned down by other banks, we heard they help Asians like us,” says Tanh Ngo, who opened the Euro Delights bakery in San Jose last year. “They were friendly. When they were talking about something we didn’t understand, they took time to explain it to us.”

Summit says its customers should not be denied a livelihood due to ignorance of American culture or standardized financial practices.

“Service is not about reaching goals or selling so many checking accounts,” says Trinh Diep, senior vice president and manager of the California division of Summit. “It’s about caring for the customer, feeling for the customer, going out of your way. For me, that’s service.”

He says many bank employees and management at banks like his share the same history as their potential clients.

“To give you an example, a lot of people came here after the fall of Saigon in 1975,” Diep says. “A lot of them came here with just the clothes on their back, but they work very hard for a better life.”

He says it was common for a Vietnamese immigrant to start as a business owner with a mobile lunch truck.

“From that, they move to a restaurant; from a restaurant, they move to a supermarket,” Diep says.

But despite an ability to succeed, Diep says circumstances can stand in the way of raising money to start a business.

“If you go to a typical bank, they look at a leverage ratio, which is your debt to capital,” Diep says. “It is very hard to get a loan.”

He says many successful immigrant-owned businesses Summit funded would never have started if traditional risk assessments were used.

“They don’t fit into the typical cut-throat environment of, say, a bigger bank,” Diep says. “They may not qualify if their financial numbers are typed into a computer and they have to wait for it to spit out a ‘yes’ or ‘no’ on a loan.”

Diep says banks can’t forget to look at the non-tangible assets with small businesses.

“We don’t look at leverage ratios, we look at the skill of the person,” Diep says. “Look at it this way: A guy opens a business. Everything he has is in that business. This is the livelihood of his spouse and the future of his children. Will he ever walk away from that business? No. And that’s what we understand.”

Specialty lenders hope cultural values shared by banker and client will continue give them a competitive edge in the local market.

One out of four South Bay residents are classified as Asian, ranking second only to those who identify as white and slightly ahead of the region’s Latino population, according to the 2000 national census.

By 2025, the Bay Area will add
1.4 million new residents and 1.2 million new jobs in an increasingly ethnically diverse population of 8.2 million, according to the Association of Bay Area Governments (ABAG). Half of those new residents will migrate to the Bay Area — many from other countries, ABAG predicts.

But the way the U.S. Census Bureau classifies race or ethnic origin can be confusing. For example, the census definition of “Asian” doesn’t match the geographic continent of Asia.

Here is a look at the census definitions of race:

American Indian and Alaska Native: A person descended from any of the original peoples of North and South America. Along with members of American Indian tribes, this includes those descended from the original inhabitants of countries such as Mexico, Cuba and Brazil.

Asian: A person descended from the people of Asia, including China, India, Vietnam, Korea and India. Some Indians object to being lumped into the Asian category, citing significant cultural and language differences. Immigrants from other countries in Asia, such as Iran and Armenia, are considered “white.”

Black: A person descended from the peoples of sub-Saharan Africa or many non-Spanish speaking Caribbean islands including Haiti.

White: A person descended from the people of Europe, North Africa and the Middle East.

Other racial categories of the census include Native Hawaiians and Pacific Islanders.

In the last census, the government removed its Hispanic designation. Those identifying as Hispanic can be of any race originating from a Spanish-speaking country such as Spain (white), Mexico (American Indian), Peru (possibly Asian, with its large Japanese population) or the Dominican Republic (black).

BY DAVID SPEAKMAN

As the albatross of spam e-mail chokes businesses, entrepreneurs are rushing into a crowded market to battle the costly problem.

In recent months, more than 50 companies — ranging in size from relatively unknown startups, such as Qurb Inc. of San Mateo and FrontBridge Technologies of Marina del Rey, to established companies, including Network Associates Inc., EarthLink Inc. and Symantec Corp. — have targeted e-mail spam.

Facing a sluggish economy and lured by huge market demand, established computer-virus combatants are joining the spam-fighters. Three weeks ago, antivirus company Trend Micro Inc. of Cupertino joined the fight by launching a major antispam initiative using technology from e-mail manager Postini Inc. of Redwood City.

Market researcher Radicati Group Inc. of Palo Alto predicts 13 billion spam messages will be sent each day this year, making the spam-fighting market worth more than $650 million by year’s end. Assuming no new laws prohibiting unsolicited e-mail go into effect, by 2007 spam-fighting could grow to a $2.4 billion market, Radicati predicts. The potential has venture capitalists taking notice.

“We talk to a lot of big, Fortune 500 companies to see where [information technology] spending is taking place and all the time the first thing that comes up is spam and e-mail management,” says Mark Fernandes, a partner with Sierra Ventures of Menlo Park. “Spam, viruses, instant messaging — how do you control all of that for large enterprises? Yes, consumers face the problem. But, I think on the business side it’s a bigger issue.”

Government and industry estimates that businesses worldwide will spend $10 billion this year combating spam.

“It’s hard to quantify the costs of spam,” says Margie Arbon, director of operations for nonprofit spam fighter Mail Abuse Prevention System LLC (MAPS) of Redwood City. “Spam affects costs in server storage, bandwidth, personnel costs of deleting e-mail and possible missed business communications when mail boxes become full or mail servers clog and shut down.”

Spam-fighting companies either sell software to consumers and businesses or sell spam resources to other spam fighters. MAPS and Spam Cop of Seattle operate as spam resources that maintain and sell lists of spam-origination points to companies blocking incoming spam. However, most spam fighters, particularly providers of Internet e-mail services such as EarthLink Inc., America Online and Microsoft’s MSN, focus on consumers. Some software vendors offer filters that detect spam after it arrives in a personal computer or corporate e-mail server. For example, Network Associates of Santa Clara offers a range of McAfee-branded spam-and-virus filter combinations for consumers and businesses.

Many software and technology analysts are supportive of broad-based e-mail management software or services that eradicate spam, e-mail viruses and other unwanted incoming Internet communications before they reach a company’s servers and with little or no personal computer software installation needed. With dozens of products and vendors from which to choose, more businesses, including Xilinx Inc., Morrison & Foerster LLC, Pinnacle Systems and The Rand Corp., have turned to e-mail management services to defeat spam.

“It’s a very crowded market ripe for consolidation,” says market analyst Maurene Grey with Gartner Inc. of Stamford, Conn.

She believes spam-fighting startups have little chance at long-term success because e-mail management will consolidate into one or two big players that contract to handle spam and virus filtering in a one-stop shopping manner.

Sierra Ventures agrees and backs e-mail manager FrontBridge Technologies because it offers a service, instead of a product needing maintenance by an on-site information technology (IT) department. Anti-virus giant Symantec Corp. of Cupertino, owner of Norton Utilities, has a business partnership with FrontBridge. Symantec also owns about 12 percent of spam-fighter Brightmail Inc. of San Francisco and has a seat on its board of directors. Brightmail lists Microsoft Corp., EarthLink and Verizon Communications Inc. among its customers.

“Once spam gets through your firewall, if you’re a bank, federal regulations force you to archive it for many years,” says Sierra’s Fernandes. “We felt that a service offering was very interesting from the point of keeping spam from entering your enterprise to begin with; filtering it before it got in.”

But the thought of someone or something going through e-mail is hard for some business owners to stomach.

“It’s a good business model, but I don’t think a lot of companies would want to do that,” says market analyst Masha Khmartseva of Radicati. “It’s a pure psychological factor. A lot of companies don’t want their e-mail to go through anybody.”

E-mail manager Postini, which is roughly 20 times bigger than FrontBridge, says it faces the question all the time.

“For a lot of customers, there is a concern and typically, when they dive into it and realize that your mail already floats around a half dozen mail servers before it gets to you, one more step hardly matters,” says Doug McLean, Postini’s vice president of marketing. “Valid e-mail is very secure on our service. It is never copied to a disk, gets analyzed in memory only and it put right back out on the wire. It’s only here for half a second.”

With antispam still developing as a market, e-mail management startup companies, such as Postini and Frontbridge, are betting their technology will be needed for years to come.

NBC’s San Jose investment pays off as viewership and news awards continue to grow

BY DAVID SPEAKMAN

Last year a tectonic shift reshaped the Bay Area’s television landscape when NBC abandoned San Francisco and started broadcasting from KNTV Channel 11 in San Jose. Despite controversy, KNTV thrives and its audience has adapted to NBC’s new local home, station management says.

Media critics and some San Francisco elite lambasted the move, saying the TV network was committing a cultural crime moving to a station that was little known outside of Santa Clara County and whose broadcast signal didn’t reach San Francisco or North Bay counties.

“Obviously there was a set of challenges, especially in a startup situation like this,” says Jim Cuneen, CEO of the San Jose Silicon Valley Chamber of Commerce.

“We’ve had a certain amount of layers in the Bay Area where the media was in San Francisco,” Cuneen says. “Now with NBC and Knight-Ridder Inc. here [in San Jose], the local media landscape is more diversified.”

Adding to its challenges, NBC’s switch happened at the depth of the dot-com recession when local TV advertising rates sunk to their lowest levels in years.

“You have to look at the big picture,” says Linda Sullivan, president and general manager of KNTV. “In any startup there are issues you’ve got to address. For us it was the signal.”

KNTV boosted it’s transmission power from 79 kilowatts to 182 kilowatts, the maximum allowed by the federal government. KNTV also had to convince local cable systems and direct broadcast satellite TV systems to carry its signal, which combined, gives the station access to 88 percent of Bay Area households.

Still, the more-powerful over-the-air signal fails to reach sections of San Francisco and the North Bay. Sullivan points out that some South Bay residents couldn’t tune in NBC from TV antennas when it was broadcasted from San Francisco.

“No station has 100 percent over-the-air coverage because of the mountainous terrain,” Sullivan says. “But increasing the quality of our signal is still a priority and we hope to be able to relocate our transmitter closer to the bay.”

Another challenge was expanding news coverage to the entire Bay Area without losing its established Santa Clara County audience, she says

“The South Bay is our priority, but at the same time we are licensed to serve a larger area,” Sullivan says.

Known for his one-liners, Cuneen swipes at San Francisco critics who still call for NBC to return.

“San Francisco is one our most important suburbs,” he jokes. “As the second largest city, it still has a lot to offer the Bay Area.”

But for KNTV’s sales staff, the station’s underdog image was no laughing matter.

“Our sales department has been through the wringer,” Sullivan says. “A little over a year ago, they were being told, ‘It’s never going to happen. Give it up.’ And yet in 2002, in one month, we billed what the station did in the whole year in 2001. Again, that gets back to the entrepreneurial spirit of the people here.”

Sullivan cites the capital investment NBC has made in a new bureau in San Francisco and plans to build a new building in San Jose.

“We’ve tripled the number of live trucks, we’ve increased the amount and quality of equipment both in the news and engineering,” Sullivan says.

On April 4 the Associated Press Television Radio Association of California and Nevada (APTRA) will present the station with seven news coverage awards — more than any other Bay Area TV station.

Fiscal impact of extending insurance to domestic partners is minimal, HR expert says

As legal and cultural definitions of what constitutes a family changes, Bay Area businesses have been at the forefront of a nationwide trend of extending employee benefits to nontraditional households.

One of the most popular practices is extending health insurance benefits to an employee’s domestic partner (DP). Currently 37 percent of Fortune 500 companies and about 4,000 California government agencies and businesses offer some form of domestic partner health plan, originally intended for same-sex couples.

Tim Biddle, head of the San Francisco office of human resources consulting firm The Segal Co., a subsidiary of The Segal Group Inc., spoke with Biz Ink reporter David Speakman about issues businesses face when considering domestic partner health plans.

How is “domestic partner” defined? Does it apply to all unmarried couples?

There is no single, prevailing definition of a domestic partner. However, there are several requirements that are common to almost all definitions. The partners must be in a relationship of mutual caring, support and commitment. They must be dependent upon one another for economic support. Examples include sharing financial responsibility for a lease, mortgage or other loans or using a joint checking account. And they must maintain the same permanent residence.

Some companies that offer domestic partner benefits include opposite-sex couples, but many include only same-sex couples. Some require that, where a registry is available, the couple must register as domestic partners. And, some insurance plans require that domestic partners must have lived together for a length of time — typically, from six to 12 months — before qualifying for benefits.

What are the advantages for a company offering DP benefits?

Companies that offer domestic partner benefits are putting their nondiscrimination policies into practice. Actions speak louder than words, and employees and prospective employees frequently are a company’s most important audience. Domestic partner benefits can help a company attract and retain highly qualified employees. And, if your competitors are offering these benefits, you will be at a disadvantage if you don’t follow suit.

What is the nationwide trend regarding DP benefits?

The Bay Area led this trend, but it definitely has taken on national proportions. According to the Human Rights Campaign, 5,750 companies nationwide offer domestic partner benefits. This may seem like a small number, but it includes 185 Fortune 500 companies. Eleven state governments and 184 local jurisdictions offer domestic partner benefits, and hundreds of nonprofit and academic institutions do so, as well.

How will a choice to offer DP benefits affect smaller businesses, which already have a hard time finding an insurance carrier?

As more and more employers are requesting domestic partner coverage, the insurance industry is responding. Today, it is much easier for employers to find insurance plans inclusive of domestic partners. Competition demands it and actuarial statistics indicate that claims for domestic partners are no more expensive than those of spouses. In fact, the practice of levying surcharges has virtually been eliminated in most areas. In San Francisco and Portland, Maine, laws are in effect requiring insurance companies that provide spousal coverage to [also] provide the same coverage to domestic partners.

What additional costs are there for DP benefits and who pays for them?

The majority of insurance companies now include qualified domestic partners in their plans at the same premiums as spousal/family coverage. Employers that offer such coverage typically require employees to pay the same percentage of the cost of coverage as married couples do.

What are the tax liabilities for employees enrolled in DP programs?

Any benefit provided by employers that is not specifically excluded from taxation by law is considered taxable — and domestic partner benefits are not typically tax-qualified. Thus, the employee must pay income tax on the fair market value of coverage. Because the value is considered income, it also is subject to withholding, FICA, FUTA and Medicare. However, it’s worth noting that in California, domestic partner benefits have been excluded from state income tax by AB 25.

In general, the taxable nature of domestic partner benefits appears to be a significant disincentive to use them. We assume that if a domestic partner has access to coverage elsewhere, he or she will take advantage of the other plan.

What lessons have we learned in the five years since DP benefits have increasingly become an accepted business practice?

Domestic partner benefits have almost none of the disadvantages that people assumed might occur and offer many advantages. Employees like them and companies that offer them are viewed as “employers of choice.” There’s been almost no backlash. Some boycott attempts actually have backfired on the organizers by generating widespread support for the organization being boycotted.

Domestic benefits have not created significant burdens for employers, either. There is some administrative complexity in setting them up, but no greater ongoing burden than with any other benefit. And, enrollment has remained very low — less than 2 percent of eligible employees take advantage of domestic partner benefits.

Perhaps the best indication of the success of domestic partner benefits is the fact that very few employers that initiated such plans have dropped them.

Apple Computer Inc. of Cupertino elected former U.S. Vice President Al Gore to its board of directors March 19.

“Al brings an incredible wealth of knowledge and wisdom to Apple from having helped run the largest organization in the world — the United States government,” Apple CEO Steve Jobs said in a written statement.

Gore is adding to his Silicon Valley business ties. He currently serves as a senior adviser to search engine Google Inc. of Mountain View.

“I have been particularly impressed with the new MAC OS X operating system and the company’s commitment to the open-source movement,” Gore said in a statement.

Venture advisor now a midwife for M&As

BY DAVID SPEAKMAN

Shaking off the dot-com boom and bust, the company once called Garage.com and known for helping entrepreneurs develop elevator pitches and slide presentations to wrangle money from venture capitalists, changed its name two years ago and now is retooling its focus.

Garage Technology Ventures is trying to reinvent itself as an early-stage investor and deal midwife. With a recent $10 million cash grant from California Public Employees Retirement System (CalPERS), the ever-optimistic Palo Alto company is moving into new territory. After eliminating 75 percent of its work force and cutting salaries of its remaining 12-person team, Garage is expanding beyond brokering early-stage venture investing deals to merger-and-acquisitions consulting and direct seed investing.

“We can’t wait for Nasdaq to go to 5,000 before we start investing again,” says Garage co-founder, CEO and chairman Guy Kawasaki, one of the company’s four managing directors. “What Nasdaq is today has virtually no relationship to what I care about, which is what Nasdaq will be three years from today.”

The burst dot-com bubble changed the venture capital terrain.

“A startup today is very different than at the height of the bubble,” says Kawasaki, a former evangelist for Apple Computer Inc. and author of seven marketing books.

He says one of the hard-learned lessons of the past two years is cleverness alone doesn’t cut it today.

“A very clever idea without the technology behind it is not a fundable idea,” Kawasaki says. “But if you have an algorithm or some hard-core technology, that’s more fundable today. But even that’s difficult. I’m not a technical person, so I tell people here at Garage that if I can easily understand the technology behind the company, the company is not fundable. VCs are looking for real hard-core stuff.”

Kawasaki isn’t the only venture capitalist with this belief.

“That’s largely true; that’s correct,” says Ben Yu, a partner at Menlo Park-based VC Sierra Ventures. “Given the fact there’s less visibility to the market itself, we don’t think this is the right time to invest in business models and business plans, but rather invest in strong technologies and very strong products.”

Kawasaki says the shift may hurt innovation.

“There are many successful companies today that would not be funded under those strict rules,” Kawasaki says. “The pendulum has swung from funding anything and anyone who can do PowerPoint to funding only proven ideas. We think it has swung too far.”

With the initial-public-offering market stagnate, many small and viable startup companies view merging or being bought as the only viable cash-out strategy for their venture investors, he says. Only seven Bay Area companies have gone public in the past 12 months compared with 139 in the same period ending March 10, 2000, the day Nasdaq hit its all-time high, according to Los Angeles-based IPO Monitor. Garage hopes to stay afloat by advising on mergers and strategic purchases.

Garage’s strategy is to focus on companies that will make good acquisition targets for existing players, as Kawasaki believes the M&A market is the first to return in a recovery.

“Typically we would represent the seller,” Kawasaki says. “There are a whole lot of companies that can be acquired for $20 to $50 million.”

While Guy Kawasaki is a household name in the valley VC community, Garage has never had a homerun along the lines of Kleiner Perkins Caufield & Byers’ funding of Cisco Systems Inc. or Draper Fisher Jurvetson’s funding of Hotmail, which sold to Microsoft Corp. for $450 million.

Some of Garage’s better-known investments include Gator Corp., FutureTrade Securities LLC and Digital Fountain Inc.

Some future M&A candidates belong to Garage’s own stable of aging startups. Kawasaki doesn’t expect much competition from investment banks, claiming they shy from deals worth less than $100 million.

“We think there is a very attractive place there underneath what the bulge market will do,” he says. “But it’s still large enough where the fee structure could be several hundred thousand dollars. A couple hundred thousand dollars is what the bigger guys spend on catering.”

Garage also banks on seeding new companies with direct investments, using a $10 million infusion from CalPERS and some of its own money. It plans to fund businesses like single-idea software startups needing a small cash infusion to fully develop an idea — the type of venture bigger investors may overlook.

Garage will target California companies that that could be fully-funded at $15 million.

“With a few local exceptions, most VCs are not interested in seed round ventures right now,” Kawasaki says. “I predict we’ll look back at 2002 and 2003 as great years. We’ll all be saying we should have invested more money.”

Partners say cross-country investments are not a problem when the companies are mature enough to forgo intense hand-holding

BY DAVID SPEAKMAN

A solid business model and products on the shelves has one of the valley’s largest venture funds willing to leap the continent to invest in a Sunshine State startup security technology company.

By leading a $12.1 million third round of funding for AuthenTec Inc. of Melbourne, Fla., Sierra Ventures of Menlo Park, arguably best known for helping launch Intuit Inc. of Mountain View, strengthens a venture capital presence in the Southeast, the nation’s third-hottest venture capital region.

AuthenTec began as a semiconductor startup and morphed into biometric sensors — touch pads that read fingerprints for security doors and locks to keep people out of laptop computers and mobile telephones.

Because AuthenTec already has product on the shelves, investing millions of dollars in a company more than 2,000 miles away doesn’t worry Sierra, which is drawing from a $500 million fund raised in 2000.

“If we were investing in a series A company with two guys out of a garage, we would almost always invest in Silicon Valley just because of the amount of attention we must give to the company,” says Sierra Partner Ben Yu.

“But given the fact that [AuthenTec CEO Scott Moody] is a very seasoned executive and we feel the management team is very complete, we get enough level of comfort to feel that distance will not be a problem.”

This is not Sierra’s first cross-continent investment. Along the East Coast, Sierra’s portfolio contains companies stretching from Florida to Canada.

According to PricewaterhouseCoopers’ MoneyTree research, startups in the Southeast region, which includes Florida, Georgia and North Carolina’s Research Triangle, raised $399 million last quarter, making the region the third most-popular destination for venture capital dollars.

The Southeast comands 9.6 percent of the national venture-funding pie.

Silicon Valley, by comparison, led venture funding with $1.5 billion in the fourth quarter of 2002, or 35.9 percent. New England was second with $491 million, or 11.9 percent.

While most of Sierra’s investments are in the Bay Area, Yu says AuthenTec had the right mix to attract a long-distance round of capital.

“It’s going back to basics — solid management teams and great fundamental technologies aiming at an emerging market,” Yu says.

Since the 2001 terrorist attacks, security is a venture buzzword “that’s what we saw in AuthenTec,” Yu says.