L.A.’s High-Profile Zone Ventures Faces First Test

With a club that attracts hundreds of entrepreneurs every quarter, a monthly magazine and a new $100-million venture capital fund, Zone Ventures is one of the leading cheerleaders for Los Angeles’ growing technology community.

But it remains to be seen whether Zone, the Southern California arm of the Silicon Valley venture firm Draper Fisher Jurvetson, has the investment savvy to become a credible force.

With about $30 million invested in nearly 20 tech companies since its formation in August 1998, Zone has become one of the better-known venture funds in Los Angeles.

Venture capitalists such as Zone raise money from investors and buy stakes in small, fast-growing companies. Zone specializes in very-early-stage companies, some with just a handful of founders and an idea on a piece of paper.

Zone’s investments include Santa Monica-based Gowarehouse.com, a business-to-business Internet-based exchange hub for e-tailers; Los Angeles-based Traffic Station Inc., a provider f personalized traffic information online and mobile communications devices; and L.A.-based ShowBiz Data, a search engine targeting entertainment industry insiders, wannabes and movie buffs.

“We’re trying to build a horizontal layer into the Internet,” said David Cremin, a partner at Zone. “We’re trying to create revolutionary companies by trying to imagine what the Internet will look like in five to 15 years.”

None of Zone’s portfolio companies has gone public through an initial offering, or been purchased or merged. Thus, original investors have yet to see what kinds of returns Zone can produce.

Zone Ventures was formed to manage a fund for the Los Angeles Community Development Bank to invest in downtown L.A.’s “empowerment zone,” one of eight urban zones in the United States designed to stimulate economic revival. Zone has invested almost all of Zone I, a $25-million economic development fund that focused on bringing companies to downtown Los Angeles.

Some local observers question whether Zone has a coherent investment strategy or the financial acumen needed to become a successful venture investor.

“We need to wait and see if the public markets will validate their tastes,” said Jon P. Goodman, executive director at EC2, a business incubator at USC’s Annenberg School for Communication.

Zone’s first big test could be coming soon. EStyle Inc., the Los Angeles-based online clothing store aimed at women and parents, is picking underwriters for an initial public offering. That IPO could come in early summer, though it’s unclear how large it will be or how much of a stake EStyle will offer. Zone recently invested $10 million for a roughly 20% stake in the company, whose Web pages include Babystyle and Kidstyle.

“EStyle has a very focused management team and could be a good success story if they manage to attract even a portion of the [online clothing] market,” said Rohit Shukla, president of the Los Angeles Regional Technology Alliance, a private nonprofit industry group. “Whether Zone can provide them with the oomph in the market that a big-name venture firm can--a Brentwood or a Redpoint--that remains to be seen.”

Besides working with its portfolio companies, Zone is known for its Zone Club events held each quarter. The last one, held at the Museum of Science and Industry, attracted nearly 1,000 entrepreneurs and financial types. Zone also publishes the Zone News magazine, which includes profiles of local tech companies and industry people, along with a resource guide. Like most in-house company publications, it tends to write favorably of Zone-financed companies.

“Los Angeles has never been No. 1 in venture capital, and everything we’ve tried to do is geared toward helping to build a technology community here,” said Frank M. Creer, a managing director and partner at Zone.

In March, Zone completed the raising of its second fund, this one at $100 million and without the geographic restrictions of investing in the empowerment zone. Investors include Imperial Capital, Union Bank of California, Mellon Ventures, SunAmerica and Sutro & Co.

These days, $100 million isn’t considered a huge fund.

“Even your pet chimpanzee could raise $100 million in today’s venture climate. Now, Idealab raising $1 billion--that’s big news,” said one prominent venture investor, noting that Idealab, the Pasadena incubator formed by Bill Gross, completed a large financing round in early March.

Still, Zone partners say this is the right size for a Los Angeles “seed fund,” because it invests in relatively modest first-round increments of about $1 million and second-round increments of $5 million to $10 million. Sometimes it will invest as little as $500,000, the partners said.

“Normally, we are the first ones in--and the only ones in,” said Creer, who said Zone will be hiring an associate to help invest the new fund in the next month.

Several entrepreneurs from Zone’s portfolio companies say they like working with the Zone team.

“We wanted someone local that would pay attention to us,” said David Howe, 35, chief executive of IPal, which develops a personalized software application that informs people instantly of information they crave, such as sports ticket availability. Zone invested $1 million in Culver City-based IPal’s first round of funding, as the sole backer. Howe worked with Zone’s newest partner, Darius Sankey, when they were both consultants for the consulting firm McKinsey & Co.

“They know a lot of people in the area, and when you are hiring as well as partnering, that helps,” Howe said.

He said IPal might try for a big-name venture fund such as Kleiner Perkins for its second financing round. Start-ups generally need two or three rounds of increasingly large funding before going public.

Zone has helped to create a sense of community among Los Angeles tech entrepreneurs, Howe said.

“Idealab has not been very generous or open with the community at large,” he said. “They are very good with their own companies--but that’s not the same as creating a tech community.”

Richard Koffler, head of Koffler Ventures, a small downtown Los Angeles incubator, also noted Zone’s cheerleading abilities.

“With the Zone Club, the magazine, they’ve really helped create interest, excitement and hope here,” he said. “A couple of years ago, people thought Los Angeles was a wasteland in terms of technology and had no major venture community.”

But he agreed with others that “the jury is still out” on Zone’s investment strategy. “It’s still early. Some of their investments I don’t understand--but maybe that’s just me.”

Draper Fisher Jurvetson’s Tim Draper, who is also a managing director at Zone, said the investments make sense to him.

“We’ve got a portfolio that will clearly be the envy of the venture community,” he said. “Right out of the box we think we’ve got a big win with EStyle.”

Times wire services were used in compiling this report. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.