Surge of Venture Capital Bodes Well for Southland
Two new venture capital funds with $90 million to invest hope to begin funding businesses in Southern California in the coming months.
In addition, the $68-billion California State Teachers’ Retirement System decided last spring to increase its venture capital investment by $300 million nationwide, and some of this money will end up in Southern California businesses.
The two new venture capital funds, along with two others profiled in this column last week, represent the biggest infusion of venture capital into the Southern California economy in many years. In all, the four funds hope to inject between $148 million and $168 million into new businesses in the region, depending on how close to their capital targets they come.
Equally important, this new money should lure other venture capital to Southern California, even if slowly. Venture capital tends to follow the herd to limit the risk, and it became hard to find here over the last decade as Southern California’s tens of thousands of new small businesses replaced the disappearing defense and aerospace industries.
Robert Kibble, a San Diego venture capitalist, and two partners target their new fund, Mission Ventures, at information technology and health-care companies in Southern California.
Mission Ventures raised $27 million in only five months toward a goal of $50 million, in part because the fund had strong backing from the San Diego business community led by Mayor Susan Golding. The fund has already financed two Southern California companies, Sandpiper Networks Inc. of Westlake Village and Hospitalists Inc. of Long Beach, and expects to close many more deals over the next four years.
Sandpiper Networks sells a software product designed to deliver low-price bandwidth to Web-page publishers, cutting the time it takes Web users to download data during busy periods. Mission Ventures joined two other Los Angeles funds, Brentwood Venture Capital and Media Technology Ventures, in a $6-million financing of Sandpiper Networks last month.
Hospitalists, founded last year by a group of physicians, offers medical and information management services designed to reduce the cost of caring for hospitalized patients. Mission Ventures joined the California venture capital firms Crosspoint Venture Partners and Accel Partners and several Hospitalists physicians in the $3.5-million deal.
About 50 business leaders in San Diego raised the first $7 million of Mission Venture’s capital pool. The balance of the fund came from individual investors and institutions.
“In both Northern and Southern California, you have an abundance of universities and a knowledge-based work force,” Kibble says. “But we lack giant companies like Hewlett-Packard to which to look for middle management for early-stage companies, and most obviously, we lack professionally managed venture capital.”
At present, Kibble notes, something like 80% of the venture capital in Southern California comes from Northern California.
“People ask: What does that matter? If you talk to entrepreneurs, they say it does matter--because they would much rather deal with local sources with local connections to attorneys, accountants, public relations, recruiting and all the other things a company needs.”
Mission Ventures seeks early-stage investments in Southern California businesses engaged in information technology activities ranging from the manufacture of equipment to the development of software.
Another San Diego fund, Windward Ventures, under general partner David Titus, expects to invest $40 million in similar ventures.
Windward Ventures joined two other California venture capital funds, New Enterprise Associates and U.S. Venture Partners, in injecting $5 million into Accelerated Networks Inc., a Thousand Oaks company developing technology to allow very high-speed data transmission over conventional telephone lines for the home and small-office market.
Titus says he and his partner, Jim Cole, a Los Angeles venture capitalist, seek deals requiring initial investments to $1.5 million and total financing of $2 million to $3 million--typical ranges for venture capital funds.
“We typically want to be the first professional venture capital in a company,” Titus says. “The entrepreneurs may have raised their start-up money from friends or angels, and we want to be the initial venture capital fund--because this allows us to shape the deal to suit our objectives.”
Like Kibble, David Titus expects it to get easier to raise venture capital for Southern California businesses as time passes.
“In reality, it’s difficult to raise venture capital anywhere, not just here in Southern California,” Titus says. “But it will be different five years from now. We’ll have Windward Ventures II and Mission Ventures II--and I hope we’ll all be like Forward Ventures, one of the original San Diego funds.
“They focused on early-stage health-care companies, and the first Forward Ventures fund raised $2.5 million. The next raised something like $12 million, and they just closed on the third, at $42 million.
“We all want to do the same.”
Meanwhile, the giant California State Teachers’ Retirement System has no timetable in mind for its increased investment in venture capital, and not all the money will go to California businesses, according to Patrick Mitchell, the pension fund’s chief investment officer.
But, in all, the fund allocates $3 billion to what it calls “alternative investment funds,” of which it wants 30%, or $900 million, to go to venture capital funds, according to Mitchell. That’s $300 million more than CalSTRS used to invest in venture capital.
“Our job is to get the best return, and if we can do that by investing in California businesses, that’s fantastic. But if it means we have to invest in Massachusetts, that’s where we go,” Mitchell says.
“We are investing money in alternative investments, and a percentage of that will go into venture capital--and a high percentage of that will go to California businesses.
“We’re increasing our allocations to venture capital, and venture capital means California.”
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Freelance writer Juan Hovey may be reached at (805) 492-7909 or via e-mail at jhovey@compuserve.com
To chat with venture capitalists online, please go to “SPECIAL REPORT: Raising Capital in Los Angeles” at https://www.latimes.com/smallbiz
