Velocity revs up new fund

The Golden State capital city of Sacramento, Calif., may not get a lot of attention in venture circles, but Velocity Venture Capital is betting that with a fast growing population and two research universities, the area’s startup scene is poised to take off.

Last week, Velocity led the $1.5 million Series A funding round for Freepath, a Folsom, Calif.-based developer of tools and communities to enable the sharing of digital content. The company is one of 11 that Velocity has backed since the firm was launched in 2005 with a $2 million fund. Partners followed up with a $15 million fund a year ago and the firm says that it is preparing to raise a third fund with a target fund size of $60 million later this year.

“It used to be if you were an entrepreneur here you’d typically move two hours away to Silicon Valley when you were ready to build up your company,” says Jack Crawford Jr., Velocity general partner. “What’s changed is Sacramento has reached critical mass as its own ecosystem.”

Last year, just 14 companies in the region raised venture funding, bringing in $80 million, according to Thomson Financial (publisher of PE Week). As in years past, the lion’s share of funding came from firms based about 100 miles southwest in Silicon Valley.

If Velocity has its way, however, 2008 will shape up much differently. Crawford points out that Velocity is not the only fund based in the Sacramento region. Other regional venture investors include American River Ventures, CVV Partners, Diamondhead Ventures and Wavepoint Ventures, an early stage investor that also has an office in Silicon Valley.

Crawford says that one reason Sacramento is ready for venture growth is the rise of cleantech companies in the area. Velocity has invested in Jadoo Power, a maker of portable fuel cells, and Marquiss Wind Power, which is developing wind turbine technology for commercial and industrial uses.

Velocity typically invests in seed and early stage tech companies with investments of between $100,000 to $3.5 million.

Crawford acknowledges that the Sacramento region’s share of the venture investment pie is disproportionately small in comparison to others of similar size. With a population of about 2.1 million, the metro area is only slightly smaller than Denver and somewhat larger than Austin, both of which rake in considerably more venture dollars, Crawford notes.

But high population density alone does not ensure suitability for venture investment. Local investors are optimistic that the Sacramento region’s other features will provide the other ingredients for an entrepreneurial hub, such as the University of California at Davis and California State University at Sacramento, a base of prominent tech employers that includes Intel Corp., Hewlett-Packard and defense contractor Aerojet, and proximity to state government powerbrokers.

If that’s not enough, there’s always another carrot to attract Silicon Valley investors. With Sacramento portfolio companies, they don’t have to book a flight to get to a board meeting.

“The old view of the Greater Sacramento area as a government town is gone,” says Jacob Jorgensen, another general partner at Velocity.