When it comes to venture capital, L.A. has long lingered in the shadows of tech titan Silicon Valley and biotech giant San Diego.

But now, L.A. is poised to come into its own, with a unique blend of tech savvy entrepreneurs and creative talent drawing more venture funds to the region. And with this infusion of capital, a prolonged shakeout among local venture capital firms appears to be easing.

“There are more venture capital firms in the L.A. marketplace now than a few years ago and what’s attracting them is L.A.’s reputation as an entertainment capital,” said Mike Schoenfeld, venture capital advisory group leader for the Pacific Southwest area for Ernst & Young LLP.

Indeed, venture capital dollars are flowing into L.A. County at a rate not seen since the heady days of the dot-com boom in 2000. Last year, there were 145 venture capital deals worth an estimated $1.3 billion, according to figures compiled by PricewaterhouseCoopers LLP and the National Venture Capital Association.

But before L.A. can rival Silicon Valley, it still has significant barriers to overcome. The spread-out nature of L.A. makes it “hard to find good investments,” according to Brad Jones, managing partner of Redpoint Ventures in Brentwood and a local venture capital veteran.

What’s more, the lack of established information pipelines for both entrepreneurial companies and venture capital funding sources have led to a lot of missed opportunities for deals.

“Some companies looking for funding have simply gone straight to Silicon Valley because there’s no central place to go here for v/c funding,” said Randy Churchill, director of business development with the Southern California technology practice of PricewaterhouseCoopers.

“Likewise, because there’s no central pipeline of entrepreneurial firms coming out of the university system like one would find at Stanford University in Silicon Valley many venture capital firms simply pass over Southern California,” he added.

An outpost

Of course, these have been longstanding problems, and they are the major reason why venture capital was never as big in Los Angeles as elsewhere in the state, despite L.A. having more entrepreneurial companies worthy of funding and universities receiving just as much if not more research funding.

Indeed, 25 or 30 years ago while venture capital was launching technology-oriented firms such as Apple Computer that were spun out of Stanford University and turning that region into the world’s premier technology center, Los Angeles was very much a venture capital outpost. And for good reason: with government-funded aerospace dominating the technology and innovation landscape, there was little need for private capital.

The few players that were here including Jones (then with Redpoint parent Brentwood Associates) invested relatively small amounts of money in a hodge-podge of local firms.

“Twenty five years ago, venture capital was viewed as money that one might invest in anything, not primarily technology as it is today. And we only had a fund of $60 million, nowhere near the $400 million fund we have today,” Jones said.

In the 1980s, much of the venture capital investing was done by the major local banks. Union Bank, Security Pacific and First Interstate all had venture capital units. Then when the 1980s boom ended, the banks closed down their venture capital units. Also, as the banks themselves were acquired by out-of-state banks, the focus shifted away from venture capital.

With the collapse of the local aerospace industry in the 1990s, thousands of talented engineers were suddenly thrust out on their own. Many turned their expertise to the burgeoning arena of computer hardware, software and the fledgling Internet. To fund their enterprises, they turned to venture capital.

Then came the dot-com boom. While the boom was centered in Silicon Valley, the late 1990s were also heady days for L.A. venture capital. The magic word then was “convergence,” the mating of Internet technology with creative content from L.A.’s entertainment world and typified by firms like Digital Entertainment Network, backed by Intel Corp., NBC, Dell Inc. and Microsoft Corp.

Venture money poured into these start-ups by the millions, including $67 million for Digital Entertainment. In 2000 alone, some $5 billion in venture capital dollars flowed into Los Angeles. Several new venture capital firms started up or raised record amounts in funds from pension funds and other institutional investors.

Venture bust

But just as quickly as the dot-com boom arrived, the bubble popped. Venture funding fell off a cliff. Digital Entertainment and scores of Internet content companies like it collapsed, as did the idea of convergence.

The inevitable shakeout also came to local venture capital firms, but it took a while. “The v/c firms immediately stopped raising new funds. But they still had a five-year harvest period for the investments they made during the bubble. After five years, there was little to harvest,” Churchill said.

Smaller firms simply closed up shop; bigger ones looked elsewhere to invest. One example: Century City-based Smart Technology Ventures has invested in Israeli technology firms.

Slowly, though, venture capital funding has come back to Los Angeles. And while the word “convergence,” is rarely uttered “Web 2.0” is the new catch phrase today’s venture capital investments are focused on essentially the same area: the mating of Internet technology with creative content.

Except this time, venture capital watchers think convergence is for real. Companies like Beverly Hills-based entertainment search engine BiggerBoat.com; West Hollywood-based Fanlib Inc., which provides fans of movies and television shows a site to write their own scripts; and Santa Clarita-based SodaHead Inc., a social networking site, have all received venture capital.

“People are finally figuring out how to monetize advertising over the Internet and how to marry content with the technology,” Churchill said.

One of the strengths of the Los Angeles venture capital market is its diversity. Unlike Silicon Valley which is almost exclusively technology focused or San Diego’s biotechnology focus, venture capital flows to many other types of firms in Los Angeles in sectors like business services, health care services, logistics and consumer products.

Among the new hot areas now: alternative energy and environmentally friendly technology.

“Los Angeles is garnering a greater share of investments outside of the technology arena. The v/c folks here live and breathe this diversity,” Schoenfeld said.

The big question now: will this diversity in venture capital investments allow L.A. to better withstand the inevitable cyclical slowdown in technology that lies ahead?

In theory, yes. But L.A. was also known for a more diverse portfolio of investments during the 1990s than Silicon Valley or San Diego. And when the dot-com bubble collapsed, virtually all venture funding hit the skids.

“No question that L.A. is a tougher environment to operate in than Silicon Valley. But L.A. is my home and I’ve helped start a lot of nice companies here. We plan to continue to do so,” said Frank Kline, managing partner of Kline Hawkes & Co.