Venture capital funding slumps

Times Staff Writer

Venture capital investments in companies based in Southern California fell 25% in the last quarter of 2007, according to a report scheduled for release today.

The fourth-quarter slump touched almost all sectors except electronics, communications and networking, the report from Dow Jones VentureSource said. Particularly hard-hit were semiconductor start-ups, which received $15 million, an 88% drop from $115 million in the same quarter in 2006. Money to software firms was down 67% to $43 million from $131 million.

But while greater Los Angeles in 2007 suffered its first annual decline since 2003, for the full year, Southern California as a whole saw investments rise 12%, to $3.8 billion.

“We are seeing a sizable growth to information services, and an almost doubling of medical devices,” said Michael Schoenfeld, Ernst & Young’s director for the Pacific Southwest venture capital advisory group.

He said the outlook was strong for 2008.

In the fourth quarter, however, venture capital investments in companies in the region sagged to $689 million, failing to match an unusually large haul of $921 million during the same period a year earlier, according to the report.


Information services companies, including Internet entertainment and online advertising, attracted 13% less in the quarter, $88 million compared to $100 million.

The number of deals rose to 16 from nine.

Industry analysts said investors might be shifting their money to Internet companies because they require less initial investment and time to get a product or service to market than chip and software firms.

A dip in Internet investing could be an early indicator of a coming shake-out, said Gordon Gould, founder and chief executive of, a Santa Monica social networking company based around shopping. It raised $5 million in a second round of financing.

Internet companies are finding it easy to get seed money but harder to raise money in subsequent rounds, Gould said. “There’s a lot of false starts, and a lot of companies are not going to make it to the next round of financing because there’s no there there.”

Schoenfeld and venture capitalists said broader economic troubles, including concerns about the credit crunch and a possible recession, have not appeared to affect start-up investments yet.

“People are talking but they aren’t actually behaving as though we are in a belt-tightening phase,” said William Quigley, a Santa Monica-based managing director at Clearstone Venture Partners.

“Our deal flow seems to be increasing every quarter all through 2007, and we see that continuing,” he said. “There’s an increasing number of people willing to leave nice established jobs and go to a start-up and take a chance the equity is going to be worth a lot.”

In 2007, greater Los Angeles pulled in $1.6 billion, down from $1.9 billion the year before. Fourth-quarter investment fell 47%, to $231 million from $432 million.

San Diego County firms received nearly $2 billion in 2007, up from $1.4 billion. Fourth-quarter investments fell 12%, to $427 million from $484 million.

Orange County funding fell 12% for the year, to $482 million from $549 million. Investing in the fourth quarter fell by more than half, to $70 million from $152 million.

The Bay Area remained at the top of the heap with nearly $10 billion in 2007, a 3% gain. Fourth-quarter investments rose 17% to $2.5 billion, and Internet funding more than doubled to $548 million.