VC investments drive up SARTA Tech Index
Dec 8, 2006

Sacramento Business Journal

A barometer of the region's technology economy is on the rise again after its first decline in three years, reaching a new high in the third quarter.

The tech index calculated by the Sacramento Area Regional Technology Alliance (SARTA) hit 176.7, a hair above the first-quarter 2006 figure and up 6.2 percent from 166.34 in the second quarter. The index, based on the performance of local tech companies, was 9.4 percent above the third-quarter 2005 figure of 161.52.

Oleg Kaganovich, SARTA's chief executive, said the index rose primarily because of private-equity investments. Venture capital investors pumped a total of about $24.3 million into the companies on the index, up from about $18 million the previous quarter.

"Next quarter, my sense is you're going to see another increase due to revenue growth and possibly employment growth," he said.

KeyEye Communications landed $16 million during the quarter in a Series B funding round led by a group that includes Silicon Valley's Menlo Ventures and Sacramento-based American River Ventures. KeyEye, based in Sacramento and with outposts in San Jose and Minneapolis, builds chips to move data faster over short distances via copper wires.

An additional $7 million went to MaxPreps Inc., a Cameron Park company that publishes detailed high school sports information at MaxPreps.com. The company landed a second round of venture capital financing, including a follow-on investment by DFJ Frontier of West Sacramento.

SARTA, a public/private partnership, launched the index in second-quarter 2003, with a starting value of 100. It was created to track 50 top-performing public and private tech companies based in a nine-county region around Sacramento.

SARTA plugs companies' market capitalization figures into a proprietary formula to calculate the index. For private companies, SARTA calculates a value using revenue, employee and equity investment data supplied by the businesses. SARTA keeps the information for private companies confidential.

Capitalization of public companies on the list totaled $2.03 billion, up 0.5 percent from $2.02 billion the prior quarter.

Of three companies with falling stock values, aerospace and defense company GenCorp Inc. (NYSE: GY), based outside Rancho Cordova, pulled the index down the most with a 19.6 percent drop.

Among six companies with rising stock values, Rancho Cordova-based medical device maker Volcano Corp. had the best showing with a valuation up 44.5 percent.

Other companies with strong third-quarter showings were food-products maker NutraCea (OTCBB: NTRZ), which is planning to move to Phoenix, up 33 percent; VantageMed Corp. (Nasdaq: VMDC) of Rancho Cordova, which makes software for medical offices, up 23 percent; International DisplayWorks Inc., the Roseville electronics manufacturer that's now a subsidiary of Flextronics International Ltd. (Nasdaq: FLEX), up 22.6 percent; and Sacramento-based Digital Music Group Inc. (Nasdaq: DMGI), up 11.4 percent.

In addition to the increased private-equity investments, private companies saw revenue drop less than 0.1 percent to $491.4 million from second-quarter to third-quarter 2006. Their collective employment rose for the seventh consecutive quarter, this time by 3.18 percent to 3,209.

Year-over-year, third-quarter private revenue fell 0.5 percent, employment rose 0.7 percent, and equity investment dropped 54 percent from $52.5 million.

This is the first index to feature the same 50 companies as the previous quarter. No companies moved on or off the index. Kaganovich said it's an indication that the index is stabilizing and maturing.

This year, SARTA altered its policy for changing the index roster. It now replaces a low performer with a new company if the latter has market-capitalization growth exceeding the index average in two consecutive quarters. Previously, SARTA required that growth rate for only one quarter.

Gopan Madathil -- president and founder of TechCoire, a nonprofit technology networking and education group -- said the index does a good job promoting Sacramento-area tech companies but questioned whether any one index can fully reflect the region's tech economy.

"It is very good that it's generating visibility and awareness for the region, but if you want to look at the overall tech barometer you have to look several other places."

Acquisitions, such as the recent slew involving such local companies as Sierra Logic Inc. and Serious Magic Inc., can inject money into the economy but those payoffs are not captured by the index, he said. (Sierra Logic was among the companies in the third-quarter index.) While the acquiring companies might keep hiring locally, that rise in employment would not be reflected on future indexes as those companies -- no longer locally based -- fall off the list, he said.