Sun Valley bakery only L.A. venture to get capital.

H.K. Acquisition to use funding for further expansion

H.K. Acquisition Co. of Sun Valley was the only Los Angeles company to receive venture capital financing during the second quarter of 1994, according to a quarterly survey conducted by accounting firm Coopers & Lybrand.

H.K. Acquisitions, a manufacturer and marketer of frozen baked goods and fine desserts to the U.S. food service industry, received $500,000 of second round financing from InterWest Partners and Sienna Limited Partnership.

In its first round of financing, H.K. received capital from InterWest and Sienn to acquire Heidi's Fine Desserts in a 1992 buyout from a public company. Starte in 1984, Heidi's Fine Desserts was a pioneer in the premium dessert market.

The U.S. premium dessert market brings in annual revenues of $500 million to $700 million, but it is a very fragmented market, said Rick Wolford, CEO of H.K Acquisitions. "We saw opportunity. With the increasing number of chain restaurants and multi-unit operations, the owners want to deal with one consistent, reliable company."

Before acquiring Heidi's Fine Desserts, H.K. Acquisitions provided shelf-stable retail baked goods nationally in the retail industry and more locally to Nordstrom and Macy's departments stores in Northern California. "We saw a synergy between retail and premium food service," Wolford said.

H.K. Acquisition now employs 175 people and provides specialty desserts for The Red Lobster and The Olive Garden restaurant chains, among others.

With the American consumers' increased awareness about the food they eat, they'll be much more careful if they're going to indulge, according to Wolford. "A piece of cake that's just a piece of cake isn't going to be desirable," Wolford said.

The second round of financing primarily provided working capital to support continued growth of the company, which has seen its annual revenues grow 35 percent since it was acquired in 1992.

"It's the standard venture capital model. They needed additional capital for expansion," said Alex Seaver, general partner at InterWest. Principals of InterWest and Sienna continue to sit on the board of H.K. Acquisition. "They have a lot of experience in companies going through the stages of development. Their input is value-added to our management team," Wolford said.

The admiration is apparently mutual.

"They're a strong player in a large, fairly fragmented industry. We saw good growth there," said Dan Skaff, chairman of Sienna Holdings.

InterWest invests heavily in companies manufacturing consumer-related products in Southern California, notably the La Salsa, Il Fornaio and La Petite Boulangerie food chains. InterWest has been investing for about 15 years and currently has about $400 million in equity investments, said general partner Seaver. About 35 to 40 percent of its equity portfolio is invested in consumer-related businesses, he said.

Seaver cited comfort level and opportunity for continued growth as the main reasons for providing venture capital to H.K. Acquisition. "It's working out fine," he said.

The overall amount of venture capital invested in Southern California companies during the second quarter was down slightly from the first quarter of 1994, but it remains strong in San Diego and Orange counties.

"San Diego is known for biotechnology, and a lot of labs and universities are down there," said Jim Sigfried, a partner at Coopers & Lybrand and head of the firm's entrepreneurial advisory services practice.

The bulk of Southern California venture capital investing during the second quarter went to companies needing first round financing (start-up seed money), specifically companies in growth industries such as biotech and software.

The exception to that rule, however, was H.K. Acquisition, which succeeded in attracting second round venture capital.

The Southern California companies that received the most venture capital during the second quarter are in biotechnology -- researching and creating products fo the medical field.

Investors see the highest potential for return on their investments in companie creating breakthrough technologies and selling those technologies to a large market segment, said Sigfried. "There's a strong interest in life sciences, software and technology-based companies, and those are all down in Orange Count and San Diego," Sigfried said.

Four companies, two based in San Diego County and two in Orange County, receive more than $8 million in first round financing during the second quarter.

* CaseWare Inc., an Irvine-based producer of configuration management software, received $3.8 million in first round financing from Brentwood Associates VI L.P., Norwest, Advanced Technology Ventures, Individuals, Byers, and Stanford University.

* Biopsys Medical Inc. of San Diego received $2 million from Brentwood Associates VI L.P. and Three Arch Partners in its first round. The company produces medical devices and biopsy systems.

* Desmos Inc., a Carlsbad-based company specializing in therapeutic compounds used to repair human tissue, received $1.5 million in first round financing fro Burr Egan Deleage & Co. and Sanderling Funds.

The companies attracting the largest amounts of venture capital during the second quarter were CaseWare and Sequana Therapeutics.

Two companies received more than $4.5 million in seed money and three others received more than $5 million in bridge loans. H.K. Acquisitions was the only company in the Coopers & Lybrand survey to receive second round financing.

La Jolla-based Sequana Therapeutics Inc. -- which identifies genes involved in common human diseases -- received a total of $3.9 million in seed money from a variety of investors: New Enterprise Associates, Avalon, Comdisco, Morganthaler Donaldson Lufkin & Jenrette Securities Corp., New Enterprise Associates, Biotechvest, Sprout, Sequoia, Institutional Venture Partners, and Forward Ventures.