Venture Capital Investments in Southland Surge

By JAMES S. GRANELLI

Aug. 29, 1996 12 AM PT

TIMES STAFF WRITER

Investors risked more than $135 million on young, promising Southern California companies during the second three-month period this year--more than they invested in any other quarter in the last two years.

The surge in venture capital also reached a quarterly high nationwide as investors put $2.8 billion mainly into software, telecommunications and industrial companies, according to a survey by the Price Waterhouse L.L.P. accounting firm.

In Orange County alone, 11 companies received a total of $42.5 million.

“This quarter’s numbers show that venture capitalists continue to have a great deal of confidence in high technology and emerging growth companies,” said Carl Thoma, president of the National Venture Capital Assn.

Donald A. McGovern, who heads Price Waterhouse’s technology group, said venture capital continues to grow “at an impressive rate.”

But there are signs that venture investments may cool off.

The hot market for initial public offerings, which gives venture capitalists their profits and fuels more funding, hit a wall in July.

“That woke up a lot of people,” said Dan Afrasiabi, senior associate at Ventana Global, an Irvine venture capital company. “They realized that a lot of companies were brought to market too early.”

Afrasiabi predicts that the cooler public market will, in turn, slow down venture investments in the current three-month period.

Price Waterhouse has been tracking venture capital investments nationwide for the last eight quarters. Venture funding is private money that is typically invested in new, young or growing companies. Investors usually take their gains when their companies go public or are sold.

In the Southern California region, mainly Los Angeles and Orange counties, investors put $135.3 million into 26 companies, compared with about $86.2 million risked on 38 companies during last year’s second quarter.

Venture capitalists also put more money--$769.3 million--into Silicon Valley and Northern California companies than they had during any other quarter in the previous two years.

Only the San Diego area has seen investments go down. After reaching a high of nearly $117.4 million during last year’s second quarter, the region, with its once-hot biotech firms, garnered only $44.7 million in venture money from April through June.

In Orange County, the big winners among 11 companies that obtained venture funding were Micro Therapeutics, a San Clemente maker of devices for treating vascular obstructions, and the Cerplex Group in Anaheim, a publicly traded company that repairs computer hardware. Each received $8 million in funding.

Hamburger chain Johnny Rockets Group Inc. in Irvine, which picked up $44 million in venture funding last fall, gathered an additional $5 million during the second quarter.

The investment in Cerplex, one of several public companies that received funds, indicates that venture capitalists are being more cautious, investing in more established companies with products, Afrasiabi said.

In the last year, venture capitalists, seeing the market gobble up almost every new stock issue, brought many private companies to market much earlier than usual.

Many of those companies were two or three years away from achieving consistent profits. When companies--especially technology firms--turned in losses or poor earnings earlier this year, Wall Street backed off.

As Wall Street looked for profitable companies going public, venture capitalists began cutting back investments in riskier firms, Afrasiabi said.

“Now there’s a cooling trend for venture capital,” he said. “Venture capitalists are moving toward much-later-stage funding--those companies on the verge of making money as opposed to companies two or three years away from making money.”

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Capital Boom

In the second quarter, 57% more venture capital investment poured into Southern California than during the same period a year ago. Second-quarter venture capital investment in Southern California by industry (in millions):

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Industry 1995 1996 Distribution/retailing 0 $27.7 Health care $7.0 25.1 Software & information 27.0 22.0 Medical instruments & devices 0 16.9 Biotechnology 14.0 12.9 Consumer 9.0 10.4 Business services 0 8.0 Communications 8.0 5.8 Computers & peripherals 0 5.8 Pharmaceuticals 0 0.7 Electronics 12.0 0 Semiconductors 3.0 0 Other 6.3 0 Total $86.3 $135.3

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County Investment

Orange County firms received $42.5 million, or 31%, of the venture capital investments that poured into Southern California during second quarter 1996. Amounts in millions except Chimeric Therapeutics and GMS Dental:

Amount

Micro Therapeutics: $8.0

San Clemente; devices for treating vascular obstructions

The Cerplex Group: $8.0

Anaheim; computer hardware repair

The Johnny Rockets Group: $5.0

Irvine; restaurant chain

Elms Systems Corp.: $4.5

Irvine; Compact disc jukebox

Neocrin: $4.2

Irvine; developing artificial pancreas for treatment of diabetes

HLC Internet Inc.: $4.0