Venture Investing Up in Southland
Led by the telecom and biotech industries, total venture capital investment in Southern California companies rose in the first quarter from the previous quarter, bucking the national trend, a study expected to be released today will show.
Venture investors committed $819.6 million to Southland companies in the quarter, up from $711 million invested in regional firms in the previous quarter, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Assn. quarterly MoneyTree survey.
By contrast, venture investment nationwide fell to a four-year low of $6.2 billion in the first quarter from $8 billion in the fourth quarter, the survey showed. Total venture investing peaked at $29 billion in the first quarter of 2000.
The Southland data wasn’t all good news: The number of regional firms that got funding fell to 64 in the first quarter from 92 in the previous quarter. The survey covers Los Angeles, Orange and San Diego counties and parts of Ventura and Santa Barbara counties.
Still, the increase in the total level of funding in the region suggests that venture investors identified young companies with strong growth prospects, analysts said.
“The economic diversity of our region is really a strength,” said Randy Churchill, director of business development at PricewaterhouseCoopers in Los Angeles. “We received funding [across] a wide range of industries.”
Venture capitalists typically invest in fledgling firms in cutting-edge industries, providing the funding that can lift the companies into the mainstream. The goal is to reap a big payoff by eventually taking the firms public or selling them to larger companies.
Venture investing soared in the late-1990s, but has since crashed with the plunge in the technology industry.
“For companies trying to raise money now, it’s certainly challenging and depressing,” said Jeffrey Starr, a venture capitalist with Mission Ventures in San Diego.
Despite the tough climate, Starr said Mission pumped money into five Southland firms in the first quarter.
In total, Southland telecom-related companies received 22.1% of venture money invested in the quarter, the largest share of any industry, the MoneyTree survey showed. Even amid the ongoing shakeout in the telecom sector nationwide, venture investors still are funding new ideas in the business, particularly in the optical-components area, analysts said.
Biotechnology was the second most popular Southland industry sector, garnering 21.8% of the total invested.
Nearly 20% of the venture money invested in the region went to semiconductor firms in the quarter. Meanwhile, relatively little money is flowing to Internet and e-commerce firms, the survey found.
The MoneyTree survey counts first-time investments in companies as well as “follow-up” financing for companies already funded at least once by venture firms.
Among the regional companies that got funding in the quarter:
* Agensys Inc., a Santa Monica firm developing drugs to fight malignant tumors, received $42.8 million, the most of any L.A. company. The firm, with 40 people, is targeting prostate, kidney, colon and ovarian cancers, among others.
Agensys, which was mostly funded by individuals in its start-up in 1997, found that raising money from venture funds was tough, Chief Executive Donald Rice said. “We ran into some turbulence due to the markets and the aftermath of the dot-com and telecom declines,” Rice said. “It was more difficult than normal to get institutional investors interested.”
The company, which last year changed its name from UroGenesys, hopes to go public, but probably not before 2004, Rice said.
* Arroyo Optics, a Santa Monica firm that develops and makes “all-optical” telecom routers, got $20 million.
And Auxora Inc., a 2-year-old Baldwin Park firm that makes optical filters for fiber-optic communications, raised $3 million.
“We are very, very proud of getting this money in this climate,” said Xin Zhang, chief executive of Auxora. Venture investors in the firm included Intel Corp. and Rustic Canyon Ventures.
* Intertainer, a Culver City firm with 69 employees, raised $15 million from investors including Microsoft Corp.
“It was brutal,” said Jonathan Taplin, chief executive of the firm, which provides video on demand for broadband networks. Getting investors for the firm’s fourth round of funding took five months longer than expected, he said, due in part to arguments over the company’s value and a general freeze in investing immediately after Sept. 11.
* Cameron Health, a San Clemente firm that develops implant devices to treat cardiac disorders, took in $31.5 million, nearly half of the total $76.3 million invested in Orange County firms.
* Tensys Medical Inc., a San Diego firm that develops technology for cardiovascular monitoring, received $20 million. Nearly one-third of the San Diego companies that got funding in the quarter were biotech firms, reflecting the large number of the county’s start-ups in that sector in recent years.
* LivHome Inc., a Los Angeles company that provides personalized elder-care services, received $1.2 million.
* Strix Systems, a Westlake Village firm that develops wireless communications equipment for mobile Internet access, got $12.9 million.
There are other money deals in the pipeline for Southland firms, said Mark Menell, a venture capitalist with Rustic Canyon Ventures in Santa Monica.
However, venture activity overall isn’t likely to pick up significantly until the public equity markets stabilize, he said. Most venture funds still are trying to sustain firms they’ve already invested in at least once, Menell said.
“We’re trying to help our existing companies get through what we like to call the ‘nuclear winter,’” said Menell, who helps invest a $550-million fund.
The steep decline in venture investing nationwide means fewer new businesses and jobs, making it a worrisome economic barometer, said Sung Won Sohn, economist at Wells Fargo & Co.
Analysts said one positive sign in the national data is that venture investments in early-stage firms comprised 19% of all funds invested in the first quarter, compared with 16% in the fourth quarter.
“It is encouraging to see that new investment is being made in early-stage companies,” said Jess Reyes, a vice president at data firm Venture Economics in New Jersey. “It is a positive indicator that VCs are willing to take on more risk than they did in prior quarters.”
