O.C.’s Venture Funding Tops $1 Billion for the First Time

Led by Southern California’s growing tech industry, venture investments in companies here more than doubled to a record $4.2 billion last year, with Orange County garnering a sizeable share, according to a data firm.

Investments in Orange County, once a relatively minor player in the venture capital sweepstakes, topped the $1-billion mark for the first time last year, far surpassing the $400 million raised in 1998, according to Venture Economics, a division of Thomson Financial/Securities Data.

The bounty was split by 73 Orange County firms, with an average of $14.4 million per company. Internet retailer Buy.com of Aliso Viejo, which went public this week, took in nearly $257 million in venture capital last year, the second most of any Southern California company, while EMachines Inc., the low-cost computer maker in Irvine, was third with $155 million.

“I’m seeing lots of good deals here,” said Randall Lunn, a founding partner at Palomar Ventures in Irvine and Santa Monica. “The quality of the companies has never been better.”

Lunn said Palomar recently invested $2.5 million in Newport Beach-based Telecore Inc., which installs Digital Subscriber Lines, or DSL, for high-speed Internet access. He said Monday that Palomar plans to make another significant investment in Telecore within the next six weeks and is seriously eyeing two other high-tech Orange County firms.

Jesse Reyes, head of Venture Economics, said: “It’s the content end of the Internet game that’s driving this investment flow into Southern California. People are saying: ‘We think there’s a gold mine there.’ ”

Although it’s still early in 2000, Southern California venture capitalists and analysts said they expect investments to continue at a record pace this year, given the amount of money already raised in existing funds and the strong stock market fueling new public offerings.

Venture capitalists raise money from institutional and other major investors and then buy stakes in fast-growing start-ups, sometimes taking an active role in the company. A vibrant market for initial public offerings, or IPOs, is allowing many companies to go public at high valuations, which means strong returns for venture capitalists.

The record investments in Southern California are part of a nationwide trend. Nationwide in 1999, venture investments also more than doubled, to $48.2 billion from $19.3 billion the previous year, according to figures to be officially released today by Venture Economics.

In the Southland, the $4.2 billion in venture investments last year compared with $1.9 billion the previous year, the data firm found.

That makes Southern California the third-biggest region nationwide for venture capital, behind Northern California and the Northeast. All segments of Southern California saw increases.

Venture investment in L.A. County rose to $1.5 billion from $865 million the previous year, according to Venture Economics. Second was Orange County, with $1.05 billion, putting it ahead of San Diego County ($1.03 billion in venture capital) for the first time in more than a decade.

The area’s biggest venture deal last year was CarsDirect.com of Culver City, which got $308.3 million.

Predictably, Internet firms gobbled up the largest piece of the Southland’s venture pie, followed by communications and medical-health companies.

Ross DeVol, director of regional studies of the Milken Institute in Santa Monica, said the new data “confirms that Los Angeles is on the radar screen of venture capitalists, many of them in Northern California.” He added: “It’s indicative of how vibrant the technology screen is on the Westside, and this convergence of entertainment and technology. There’s so much start-up activity here.”

The entrepreneurial rush has more venture capitalists opening firms in Los Angeles.

“Los Angeles has become a venture capital destination point,” said Frank R. Klein, managing partner with Kline Hawkes & Co., a new venture fund in Los Angeles now raising a $350-million fund, originally targeted at $250 million. Many funds are surpassing their original targets, or at least reaching them more quickly than ever.

Despite the dramatic increase in total money invested, the number of companies in Southern California getting funding is rising more modestly. Venture Economics said 318 companies got funding in 1999, compared with 283 companies the previous year.

That means venture capitalists are making bigger bets, of course.

“Companies that once would do several rounds of funding are just getting one big funding, and that’s riskier,” Reyes said. “There’s no checking in on the status of how they are going.”

In Orange County, the performance of computer chip makers Broadcom Corp. and Conexant Systems Inc., among others, has caught the attention of venture capitalists who have yet to invest in the region.

Zone Ventures, the L.A.-based affiliate of the Silicon Valley venture capital firm Draper Fisher Jurvetson, hopes to make its first deal here sometime this year, founding partner David Cremin said.

“We’re only beginning to see the deal flow there, and we like what we see,” he said.

* TELECOM POWERHOUSE DEAL

Alhambra-based Ortel Corp. has agreed to be acquired by Lucent Technologies for $3 billion. A1