A Shift in the Money Climate

It may soon get easier to find venture capital in Southern California.

Four new venture capital funds--with about $155 million to invest--expect to begin financing businesses here by the end of the year. At least one other such fund is forming in the region.

While certainly not an eye-popping amount, especially compared with the amount of money flowing into growing companies in Northern and Southern California, the new funds constitute one of the most hopeful signs of significant infusion of venture capital into the Southland in many years.

Brent Rider and John Ulrich, who ran Union Bank’s venture capital operation a decade ago, hope to put the finishing touches on a $50-million to $70-million venture capital fund called Marina Ventures, based in La Canada Flintridge and Huntington Beach, by the end of the first quarter of 1998.

Ralph Williams, a Long Beach investment banker, expects to fund four new ventures by the end of this year with his $8-million Ventura Capital, formed 18 months ago. Those funds are joined by two in San Diego: Mission Ventures and Windward Ventures, which will be profiled next week.

The venture capitalists will find no shortage of entrepreneurs looking for money. Indeed, the one certainty about the economy of Southern California right now is that there are more entrepreneurs in search of venture capital than there are venture capitalists in search of entrepreneurs.

However, some venture capitalists complain that many of these entrepreneurs run companies that are not ready for venture money. Local entrepreneurs, for their part, argue that too many venture capitalists just aren’t interested in anything that isn’t related to biomedical or high technology.

Rider’s Marina Ventures seeks “early stage” deals--start-ups and existing businesses with good management teams and products with potentially big markets.

Rider and Ulrich expect to fund 20 ventures over five years, including first and subsequent rounds of funding, using capital pooled from wealthy individuals and such institutional investors as pension funds and endowments.

Rider says Marina Ventures seeks total returns of 25% to 30% a year. This means the successful businesses it funds must grow 50% a year to make up for those that fail.

“We’re looking for high-tech early-stage deals with big markets and most of the pieces of a good management team in place,” Rider says. “Our typical deal will go between $1 million and $2 million on the first round of financing, and we would expect to continue financing a company as it develops.

“There are a lot of people out there with damned good ideas crying for money, and it isn’t going to be a problem finding the deals. I don’t have a shingle outside my door saying ‘Venture Capital,’ and I still see one or two doable deals a week.”

In contrast, Ventura Capital, with capital pooled not from big investors but from people of modest means, focuses on smaller deals it believes have prospects for very big growth--at least 80% a year.

Williams’ investors will put up $15,000 to $50,000 apiece. The smallest of the four deals Ventura expects to fund this year will go for $350,000; the biggest, for $4.2 million.

The companies all engage in high-tech manufacturing, and none is a start-up, Williams says.

“We’re first-stage investors but not seed investors,” he says. “We need a product in place with an identified market and a company now generating some revenue.

“We intend to put money into marketing, accounts receivable and inventory. We look for some pretty aggressive growth potential, a good marketplace and, most important, a management team we can work with.”

Both Ventura Capital and Marina Ventures seek relatively short investment periods--five to seven years at most--with exit strategies through public stock offerings or acquisition.

The funds go against a strong tide in Southern California. A decade ago, venture capital wasn’t so hard to find here, but even as the region transformed itself into the nation’s hottest incubator of small business, venture capitalists were seeking the glamorous, high-tech arena of the San Francisco Bay Area.

Some venture capitalists have suggested that companies here just didn’t provide the returns or weren’t as successful as their Northern California counterparts, but Rider places some of the blame on the loss of the big defense and aerospace installations here.

“In Los Angeles we tend to blame all our economic woes on the shutdown of the aerospace industry,” Rider says. “And part of the blame is correctly assigned there. Some companies that venture capitalists invested in would have prospered had the shutdown not occurred. But that’s not all that happened.”

The consolidation of the banking industry played a part as well, Rider says. First Interstate disappeared into Wells Fargo, Security Pacific into Bank of America, and Union Bank went through two changes of ownership. In all cases, the banks’ venture capital operations either slowed or stopped altogether, Rider says.

Then there’s the herd instinct among venture capitalists, he adds.

“Many investors who provide money for venture capital work only with those funds through which they have invested before,” he says. “The funds that operated in Southern California closed down and the people who ran them went their separate ways. That makes it very difficult to put together funds whose managers have unbroken careers. I call this a kind of inertia effect. We tend to have few funds here because we have few funds here.”

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Freelance writer Juan Hovey can be reached at (805) 492-7909 or by e-mail at jhovey@compuserve.com

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Venturing Out for Capital

Obtaining early financing is one of the hardest things small-business entrepreneurs face. And in Southern California, it’s even tougher because only a dozen or so venture capital firms are based here, compared with 150 in Northern California.

Entrepreneurs seeking venture capital might want to keep in mind the following:

* Be able to describe your business in one or two sentences. You should be able to quickly explain the products or services you will sell and who the buyers will be.

* Write a short, well-edited business plan.

* Fairly assess the value of your company. In exchange for venture capital, entrepreneurs will give up a large portion of their company, even a majority stake. Timing of the financing will affect the value.

* Be prepared to invest a meaningful amount relative to your own resources.

* Before you contact a venture capitalist, check Web sites--almost all venture capitalists have them. Most list the companies they’ve invested in. See if the companies sound like yours.

* It can help to get a referral from your firm’s lawyer or accountant.

* Many venture capitalists don’t like getting business plans via e-mail. Find out the preference of the person you are contacting.

* Target four or five venture capital firms. As you get closer to a deal, remember to check references. Talk to the owners of other companies the venture capital firm has invested in.

* Let venture capitalists help fill in the gaps of a management team and bring in additional investors.

* Develop an exit plan for your investors.

* Listen, be patient, be flexible, be honest, don’t give up and never lose your temper.

Sources: Brentwood Venture Capital, Los Angeles Regional Technology Alliance, Annenberg Incubator Project at USC