Investments in Area Firms More Than Double
Despite months of stock market volatility, U.S. venture capital investments surged to $24.6 billion in the second quarter, a 96% jump over the year-earlier period, and investments into Southern California companies more than doubled to $2.1 billion, according to numbers expected to be released today by a trade group.
Although the money pouring into young companies this year is on pace to break last year’s record, investments have dipped slightly from the fourth quarter’s all-time peak.
Investments into brand-new companies have slowed, while second and third “rounds” of investments into existing portfolio companies have risen as stock market swings during the quarter have slashed the values of many tech companies and led to plans for numerous first-time stock offerings being put on hold.
Nationwide, investments in e-commerce companies sank 44% from the first three months of this year, as venture capitalists began looking closer at other sectors, such as communications equipment, according to figures from the National Venture Capital Assn., or NVCA.
First-time investments in new companies dropped an estimated 25% from the first quarter, when e-commerce companies were seemingly still being formed every five minutes.
But the venture community appears unshaken.
“Venture capitalists invest for the long term. What changed was the shift in interest from e-tailing to other technologies that will help move the new economy to the next level,” said Steve Lazarus, NVCA research chairman.
“That shift had an effect on entrepreneurs,” said venture capitalist Geoff Wang of Redpoint Ventures, a large venture fund in Silicon Valley. “Things have really picked up again, though e-tailing is very cold. There is growth in application service providers, Internet software infrastructure, communications equipment, semiconductors and optical” networking.
In Southern California, the $2.1 billion in venture investments was spread among 136 companies, compared with a total of $1 billion in 106 firms in the 1999 period. The amount of venture investments in the region this year is already more than double the amount invested in Southern California companies during all of 1998. In addition, the $2.1 billion invested in the second quarter outpaced the $1.9 billion invested in the first quarter of this year.
“The public markets haven’t thrown a lot of cold water on the venture community, but the pace of investments feels less frantic,” said Jesse Reyes, vice president of Venture Economics, a New Jersey data service that compiles data for NVCA. “While the venture world is not immune to the public markets, these investments have a long life cycle.”
In Southern California, venture capitalists said they continue to see good deals.
“I think people are overplaying what happened in April” with tech stocks selling off, said Brad Jones, a venture capitalist with Redpoint Ventures and a partner with Brentwood Venture Capital in Santa Monica.
During the second quarter, Redpoint invested in two companies specializing in optical components, he said. “I’m not at all negative about the opportunity to make money, and I don’t think the pace of deals will slow down.”
Venture capital investors put money in start-up companies with the idea of getting their investment back, plus a substantial return, when the start-ups eventually go public through an initial offering or are bought out.
Given the high rate of failure among start-ups, such investments are risky and, thus, generally limited to the well-heeled, but just one big winner can provide venture capitalists with annualized returns of 200% or more.
Los Angeles and Orange county companies that received financing during the quarter include:
* InternetConnect, a Torrance-based provider of high-speed Internet access and other services for corporations, which received $52 million.
* PeopleSupport Inc., a Westwood company started in 1998 that specializes in online customer support and caters to e-businesses, which received $50 million from such venture groups as Hewlett-Packard and Meritech Capital Partners. PeopleSupport has more than 500 employees.
* Xdrive Inc., a Santa Monica-based Internet hard-drive provider, which raised $26.8 million, according to NVCA.
Still, some venture capitalists reported putting deals on hold and setting aside more funds on reserve to help companies that might need financing but might not be able to tap the public markets if times are rough.
In Pasadena, Idealab Capital Partners, the venture arm of incubator Idealab, made no new investments during the second quarter and instead spent time evaluating and supporting its existing investments, said partner Jim Armstrong.
“We said, ‘Let’s stop looking at deals for a bit. Let’s look at our portfolio companies and see if the portfolio is in the best shape it can be,’ ” Armstrong said. Idealab Capital has invested about $125 million of its $360-million second fund in about 15 companies.
“We’ve had this great frenzy. Now we’re getting back to the venture business the way I was trained in it,” he said. Idealab itself has filed plans to go public sometime later this year.
Despite the lull, Armstrong said he is upbeat about Southern California’s prospects and expects Idealab Capital to fund several start-up companies in August, typically a dull month in the business as many venture capitalists go on vacation.
“We’re seeing some things now that I’d never thought I’d see in Southern California: major innovations in the storage networking and optical space,” Armstrong said. “It’s hard not to be bullish.”
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Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
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Venture Wave
Despite stock market turmoil, venture investments in start-up companies continued at a strong clip nationwide and in Southern California during the second quarter, though down from the fourth quarter’s record.
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Source: National Venture Capital Assn.
