Southland Reaps Venture Windfall During 1st Quarter
Venture capital investments in Southern California companies rose nearly threefold during the first quarter compared with the same time last year despite recent stock market volatility, according to a study released Thursday by a trade group.
More than $1.7 billion flowed into the region’s start-ups, compared with the $580 million invested during the same time the previous year. It was a slight decrease from the record $1.8 billion invested in the region during the last quarter of 1999, but not enough to be a concern, venture capitalists said. About half of all investments during the quarter went to technology companies, according to the study by the National Venture Capital Assn., based in Washington.
The Southern California trend has helped propel a nationwide boom in venture investing.
In the U.S., a total of $22.7 billion flowed to young companies during the first three months, on pace to top the unprecedented $50.7 billion invested nationwide during all of 1999. U.S. venture investments during the first quarter were 266% above the $6.2 billion dished out during the same time last year, according to the study.
Los Angeles County also saw a big cash infusion, with $896 million going to new companies, versus $211 million during the 1999 quarter. It was a slight decrease from the record $986 million invested here during the fourth quarter of 1999.
“It’s been amazing,” said Bob Hoff, a partner with Crosspoint Ventures in Irvine, who has been a venture capitalist for 20 years. “There is so much more money in Southern California.”
Driven by the opportunity for huge returns, several funds of $1 billion or more have been raised in recent months.
Venture capital investors put money in start-up companies with the idea of getting their investment back--plus a generous 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 considered highly risky, but just a few winners can provide venture capitalists with annual returns of 100% or more.
Southern California companies getting some of the largest cash infusions during the quarter include:
* Capstone Turbine Corp., a Woodland Hills-based company that makes micro-turbines for power generation, received $137 million from a group that included Canaan Partners. Capstone plans to go public this year with a $115-million stock offering.
* Bex.com, a San Diego-based software and systems provider for e-commerce companies, got $75 million from a group that included ABN Amro.
* Exult Inc., an Irvine-based company that seeks to help large corporations manage human resources using the Internet, received $60 million from a group including Goldman Sachs. The company filed to go public this year with an initial public offering, or IPO, of up to $200 million.
* Intertainer, a Culver City-based provider of pay-per-view entertainment via broadband networks, received $55.7 million from a group that included Microsoft and GE Capital.
However, recent stock volatility--which has slashed the market values of many Internet and other tech firms by more than half--has also shaken the venture capital community a bit. With the Nasdaq composite index down about 26% since its March 10 peak and dozens of planned IPOs pulled from the calendar, many venture capitalists are taking a harder look at new investments and scrutinizing those companies they’ve already funded.
“I don’t think the VC community is blindly charging ahead anymore,” said Rick Kroon, chairman of the Sprout Group, an $860-million venture fund with offices in New York and Menlo Park, Calif. “There was tremendous momentum in the first months, but by the end of the quarter, VCs started to do a little head-scratching on valuations of companies and [company cash] burn rates.”
There’s no evidence yet that the head-scratching has turned into a slowdown in investments, said a spokeswoman for NVCA, as activity was strong at least through the end of March even as Nasdaq dipped nearly 10% from its peak that month.
“We didn’t see a drop-off” at the quarter’s end, said NVCA spokeswoman Jeanne Metzger, although the next report could prove telling, since the tech-stock slide gathered steam in April. “The basic reason is that venture capitalists are long-term investors--they are looking for a two-to-five-year time frame.”
Though many entrepreneurs form start-ups with hopes of going public within 18 months, data show that most venture-backed companies take an average of 5.3 years, according to the NVCA.
Some observers expect a slowdown in activity in the third and fourth quarters, as venture capitalists are beginning to put more cash aside to prop up existing companies that may be unable to tap the public markets as earlier planned.
“We expect the public markets to be shut for the next six months,” said Hoff of Crosspoint, which has a $900-million fund. “So we are putting some money aside for our existing portfolio companies, in case they need it.”
But most venture capitalists such as Steve Lazarus, chairman of the NVCA’s research committee, are still expecting a record year for nationwide venture capital, given such a strong first three months.
“[The stock market] would have to really, really tank in the last few quarters for this not to be a record year,” he said.
During the quarter, U.S. companies specializing in “B2B,” or business to business on the Internet, and in Internet infrastructure, were the darlings of venture capitalists, the NVCA study found.
Venture capitalists also focused on younger firms, with about 85% of all money going to “earlier” start-ups [those with just a handful of workers] or “expansion stage” companies which have already raised money and are looking for $20 to $30 million to roughly double in size, during the quarter, versus 64.8% during the same time last year.
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Strong Flows
Venture capital investments continued at a strong pace in Southern California during the first quarter as dollar volume was about three times the year-earlier quarter. Quarterly figures, in billions:
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1st quarter: $1.7 billion
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Source: National Venture Capital Assn.
