Venture Funding Continues to Slide

Venture funding for Southern California companies tumbled 68% in the third quarter from last year’s record level, but the drop-off wasn’t as steep as in Northern California and the nation as a whole, according to a study released Monday.

The terrorist attacks of Sept. 11 didn’t have a direct effect on funding, but investors said they don’t see any significant upswing for a year or more anywhere in the state or the nation.

Some venture funds have been turning away from technology companies in favor of life-sciences and security products firms, and some funds have folded altogether.

In the last quarter, more than 80% of the money statewide and nationwide went to companies that are well established.

In the July-September quarter, venture capitalists invested $648.4 million in 69 area companies, mostly in Los Angeles and Orange counties, according to research firm Venture Economics and trade group National Venture Capital Assn.

“The market is pretty dry out there,” said Tony Bautista, president of Storactive Inc. in Marina del Rey. “We probably talked to 20 or 30 companies before finding the right investors.”

The company, founded in 1997, got about $5.5 million in initial funding to develop its computer security technology. But it didn’t have enough for sales and marketing once it had a product.

It finally picked up $11.7 million in second-round financing, along with new management, during the third quarter. The money came from Mellon Ventures Inc. in Los Angeles and Moore Capital funding in New York City.

Silicon Valley, the heart of the technology industry and the biggest benefactor of venture capital investments, felt the brunt of the slowdown. That region’s venture funding in the third quarter fell 73% from a year ago to $2.4 billion.

Silicon Valley has typically garnered about 36% of the nation’s venture funds, but its share declined to 30% of the national total.

Southern California companies maintained their 8% share of the smaller pot. Some funds went to public companies, such as Cardiac Science Inc. and Micro Therapeutics Inc., both in Irvine, and the Plastic Surgery Co. in Santa Barbara.

Statewide, venture funding plunged 72% to $3 billion in the third quarter; nationwide, it fell 73% to $7.7 billion.

Venture funding overall has been falling in each of the last four quarters from record highs, returning to levels of early 1999 and before, as a slowing economy and limited technology spending has curtailed investments.

“If you look at 1999 and 2000, most venture capitalists will say those years were really an anomaly,” said Adam Reinebach, vice president of Venture Economics in Newark, N.J.

“Just because we have a negative, a slowing economy, venture capital is not going to go away,” Reinebach said.

“Many veterans have been through this before. They know that the days of getting a company to go public in six months are pretty much over,” he said.

John S. Taylor, a vice president at National Venture Capital, a trade group in Arlington, Va., said that even without any deals in the fourth quarter, “this will still be the third-best year in history.”

Still, this isn’t a good time for start-ups. Many young and growing companies already are having a tough time finding financing.

“A lot of the activity by venture firms, both in terms of dollars and time commitments, is being focused on existing companies,” Taylor said.