U.S. Venture Investment Sees a Jump

U.S. venture capitalists stepped up their investments in emerging companies by 21% in the first half of the year compared with the same period last year, according to a report being issued today.

In Southern California, however, venture investing rose only 2%, data trackers Ernst & Young and VentureOne said. Southland companies landed about $999 million in 87 deals, compared with about $982 million in the first half of last year.

The report, issued quarterly, shows that nationwide venture investing held steady in the latest period, with $5.1 billion invested from April 1 through June 30.

For the first six months, venture capitalists invested $10.2 billion in 967 companies.

In the Southland, investments fell to $365 million in the second quarter from $634 million in the first quarter. But analysts cautioned against making too much of that swing, chalking it up to normal volatility in a region that represents only about 10% of the national market.

The first-half figures for Southern California offer a better comparison, analysts said, and are on par with numbers for the first half of last year.

Venture capitalists buy stakes in start-up companies, hoping to cash in when the firms go public through an initial stock offering or are bought by a larger company. Most of these fledgling enterprises fizzle out, but venture investors can score big from a few homeruns.

Analysts say the pickup in venture capital investments nationally is linked to a resurgence in initial public offerings. Eighty-nine companies went public in the first half, raising $16 billion, including $8.8 billion in the second quarter. By comparison, there were only six IPOs, worth a total of $1.2 billion, in the first half of 2003.

Nationally, two trends within the venture market emerged during the second quarter, analysts said.

The tech segment reaped its largest outlay of venture capital in two years, with $3 billion invested. And early-stage financings rose nationally, with 157 so-called seed and first-round deals representing 32% of the 492 total transactions.

Over the last two years, such early financings have accounted for about 28% of the totals -- a sign that wary venture investors have been reluctant to fund the youngest and least-proven companies.

“We’re seeing some very good deals now -- not as many deals as during the [late 1990s tech] bubble, but the management teams are stronger,” said Harry Lambert, managing director at InnoCal Venture Capital in Costa Mesa. “They’re watching their cash, and they know what they’re doing.”

In the second quarter, his firm invested in Hawthorne-based Siderean Software, which raised $6 million in early-stage financing. Lambert described Siderean’s products as Internet “search engines on steroids.”

Overall, analysts said the pickup in U.S. venture financings was steady -- a far cry from the record year of 2000, when $94.5 billion was rung up. Still, financings are on course to top last year, when the total fell to $18.4 billion.

“It’s a healthy pace right now, not another bubble,” said Gil Forer, global director of Ernst & Young’s venture capital advisory group. “Investors know what they’re looking for and entrepreneurs are sophisticated. There’s a balance in the market.”

Although Southern California financings were fairly flat in the first half, deals in the Los Angeles area rose to $321 million, up from $268 million for the same period in 2003, the Ernst & Young report showed.

Major Southland deals included:

* $27 million for Idun Pharmaceuticals Inc. of San Diego, which is creating drugs to treat liver disease and other ailments;

* $15 million for Vantage Oncology Inc. of El Segundo, which is developing new radiation treatments;

* $12 million for Accruent Inc. of Santa Monica, which makes enterprise software for managing contracts.

In Silicon Valley, hub of the nation’s venture market, companies raised $3.8 billion in the first half, up from $3.1 billion a year ago.