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December 5, 2007 10:00 AM

Red Herring: VCs on what's hot, what's not

Posted by Brier Dudley

A panel of out-of-town venture capitalists had a good discussion about investing trends Tuesday night at the Red Herring conference in Seattle. Too bad there were only about a dozen people in the audience.

Here are some highlights from the discussion with Paul Hsu of NeoCarta Ventures, Daniel Ahn of Woodside Fund, Rob Ketterson of Fidelity Ventures and Paul Matteucci of U.S. Venture Partners.

In healthcare, "we're seeing a lot less interest in drug discovery, a lot more in medical devices," particularly those going after big market opportunities such as diabetes and heart disease, Matteucci said.

Healthcare-related Web services are interesting but unlikely to get funded until their services covered by insurance, he said. That's a key threshold for his firm.

"We do deals that we think insurance companies are ready to pay for,'' he explained. "Insurance companies typically don't pay for information services."

Regarding information technology, Matteucci said "security is waning," but there's big opportunity in network storage infrastructure as virtualization, falling storage costs and energy consumption push companies to upgrade their networks and reduce operating costs.

Microsoft, Google and other may be investing in these services, but Matteucci said "they're one-offs -- it's not a trend."

Ahn said there's "waning interest in nanotechnology and materials." In nanotechnology, "people are realizing the task of manufacturing the stuff you're trying to sell is really hard, especially in the U.S."

Despite the promise of thin film materials and photovoltaics, investors are seeing that they're also a "pretty big challenge, not necessarily a venture opportunity."

Ketterson said there's "money still pouring into cleantech," but he wonders if they're really venture deals if it takes $200 million to $300 million to get the new technologies commercialized.

Matteucci talked up a shift in cleantech investing to vertical categories, where entrepreneurs are taking energy-intensive businesses such as concrete production and remaking them to be more energy efficient.

Hsu said VCs like capital efficient businesses and "biotech and solar can get very capital intensive."

Telecom, communications and networking are no longer the new thing, but the opportunity "hasn't gone away -- if you want to be a contrarian, do that,'' Ketterson said.

As for software, the old model "is on its last legs,'' he said, and Matteucci commented that its hard to build the software as a service model.

Ahn noted that semiconductors are the one area that's consistently attracted investment over the past 25 years.

In response to a question about whether automotive startups will start being acquired, Matteucci said he expects struggling old manufacturers like Ford may try to buy startups such as Tesla Motors.

"We're looking at a car deal right now,'' he said.

Looking forward, Ahn's interested in mobile phones emerging as the "platform of choice" in India and China and other places where people won't have multiple PCs but may have several mobile devices.

Hsu said he's interested U.S. companies selling abroad and opportunities in virtual currencies, either on mobile phones or related to online gaming. He's also looking into opportunities to invest in location-based services.

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