Benjamin Mark Cole

Armed with $350 million in fresh cash and hunting for early stage Internet start-ups, Pasadena-based Idealab Capital Partners has closed its second venture capital fund.

Pension funds, university endowments and institutional investors ponied up the money. Locally, funds came from Caltech and the Los Angeles County Retirement Association. On the national scene, investors are MIT, Mellon Ventures, Goldman Sachs and J.P. Morgan.

So intense is investor interest that the new fund has become the biggest single venture pot ever filled in Southern California, said Bill Elkus, managing director at Idealab Capital Partners. Bill Gross, who heads the wildly successful Idealab, is co-founder and managing director of ICP.

Which might make some competing funds a bit nervous.

It seems that venture funds everywhere are targeting Internet companies. In recent weeks, Jim Montgomery of Santa Monica-based Digital Coast Partners, and Brad Jones of Brentwood Venture, have announced they are raising funds of $250 million and $500 million, respectively.

Elkus is hardly unaware that a “gold rush” of venture money is chasing Internet start-ups. Indeed, some fund managers finance only Internet infrastructure companies, figuring growth on the Web is inevitable. But selecting winners and losers who sell over the Internet is a task for the dauntless a category that evidently includes Elkus.

“We invest in early stage start-ups, from content providers to business-to-business to retailers to infrastructure,” said Elkus. “But we try to get in early. It’s risky. The typical company we invest in loses money and will for years.”

So how long will the flood of money into all things Internet continue? Elkus said it might be longer than many think.

“Yes, there is a lot of money out there, but there are also a lot of deals,” he said. “You see people leaving Disney and Microsoft to start a company. You see talented and experienced people who want to start their own company.”

Elkus said the Internet has altered the playing field and gives small companies a chance to beat the big guys.

“In the past, I have written studies on the advantages of large businesses access to capital, ability to market, economies of scale,” said Elkus. “But the Internet changes the calculus. Look at eToys a small company that has bested Toys R Us on the Internet. Now eToys doesn’t have all the brick-and-mortar that Toys R Us has, and doesn’t need it. That’s the kind of thing that can happen on the Internet.”

Already, with ICP’s first fund, Elkus helped take public such companies as GoTo.com, eToys and MP3.com. Two other Idealab Capital Partners portfolio companies, Tickets.com and NetZero, have filed to go public.

Mutual fund flows

Has the stock market skated through the thin times that usually appear in summer and fall?

Yes, says Charles Biderman of the Santa Rosa-based stock service, Mutual Fund Trim Tabs (www.trimtabs.com). “The market has been down in every August for the past five years,” explains Biderman. “But then it goes up in September.”

Individual investors by the millions tend not to put money into mutual funds in August, perhaps too busy with summer vacations and house fix-it jobs. But in September, the money starts flowing again.

In addition, the new issue calendar (initial or secondary public offerings) tends to shrink in September, again because vacation-related investment bankers have been in the Hamptons.

It’s October before the new-issue plate is full again.

So in September, you have money flowing into the funds but a dearth of new product “and the market goes up, usually,” said Biderman, who has become an expert on checking market capital flows.

Biderman tracks cash flows of 1,005 leading stock and bond funds. His reports are considered early warning signals for data later released by the Investment Company Institute, which tracks the size of mutual funds.

Forget funds, go SPY

Speaking of mutual funds, managing director John Marrone, who runs the West Los Angeles office of Cruttenden Roth, has noticed that more clients are eschewing mutual funds, with their fees and odd methods of reporting capital gains.

Instead, they are buying such “unit trusts” as “SPY,” an amalgamation of all the stocks in the S & P; 500. Similar unit trusts are “QQQ,” which is made up of the NASDAQ 100, and “DIA” made up of the hallowed Dow Jones 30 industrial stocks.

“The fees on the stocks are only 18 basis points,” noted Marrone. That means 0.18 percent of the stock’s return is subtracted due to management fees. Many mutual funds run expenses around 1 percent or more.

“And there are no one-time fees or exit fees, and you have instant liquidity as long as the market is open,” noted Marrone.

As many studies have affirmed, it is very tough for mutual funds to surpass market performance consistently, and it is even tougher in a bull market.

In a bear market, mutual funds sometimes do better as they keep cash positions, which outperform equities and thus lift the whole portfolio.

Reflecting the market realities, low-cost index funds have boomed in popularity. Now even-cheaper index stocks are making their mark.

For the average investor, the emergence of unit trusts such as SPY and low-cost online trading allow the building of a diversified portfolio with much lower “transaction costs” the fees connected with investing than just five or 10 years ago.

By the way, Cruttenden Roth, a full service brokerage, is finding business good enough that it is moving to double the size of its offices in the Westwood Gateway building in West Los Angeles.

But Marrone said space is expensive and hard to find. As a result, he wonders whether financial shops will soon begin migrating to less-expensive digs than those found on the Internet- and entertainment-driven Westside.

Contributing Reporter Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].