Staff Reporter

Where's the money?

Los Angeles' technology industry has voiced this lament so often that it hangs over the city almost as tangibly as the smog.

Los Angeles attracts a level of venture capital that is wildly out of step with the number of local technology companies. Explanations and proposed solutions abound, but the best explanation may be an unpopular one: L.A's tech industry is simply too immature to attract the level of money it wants.

"A lot of people in this industry think that the recent spurt in the L.A. tech industry is temporary," said Bill Manassero, executive director of the Software Council of Southern California. "VCs (venture capitalists) look at Intel and Microsoft up north and figure that is where the action will continue to be. Outside of aerospace, L.A.'s tech industry hasn't been around long enough to prove that it has staying power."

Statistics reflect venture capitalists' skepticism when it comes to large-scale investments in Los Angeles. According to PricewaterhouseCoopers LLP, venture capital investments in the Los Angeles market (which includes L.A., Ventura, and Santa Barbara counties) totaled $274.8 million in 1997, a mere pittance compared to the $3.4 billion VCs poured into Silicon Valley last year. In the first quarter of 1998, the L.A. market received $83.7 million in venture funding, about 10 percent of Silicon Valley's $811 million for that period.

L.A.'s relative trickle of venture capital funding is falling far short of what is needed to support the thousands of tech companies that range from software to biotechnology. The Economic Development Corp. of L.A. County says there are 145,600 high-tech manufacturing and engineering jobs and 49,000 software development jobs in L.A. County. The EDC has not yet tabulated the number of jobs created by L.A's new-media, Internet-related and biotech companies.

The fact that no one has yet dedicated sufficient resources to even determine the number of tech companies or tech jobs shows just how overlooked the local industry is. And venture capitalists, observing that fact, seem to have concluded that the industry is not yet ripe for large-scale investment.

Changing that perception represents a long process upon which the industry has just recently embarked. This year, Mayor Richard Riordan's New Media Roundtable has trotted out the monikers "Tech Coast" and "Digital Coast" to refer to Southern California's general tech industry and new-media industry, respectively.

Intended to raise L.A.'s profile as a tech center, the nicknames will need years of heavy use before they become sufficiently entrenched to change L.A.'s image. Remember, it took Silicon Valley almost two decades to make the geographical area firmly synonymous with revolutionary technologies.

However, enough confusion and cynicism exist over the monikers that they face an uphill battle to attain their intended purpose of creating a coherent identity, let alone attract investment.

Another reason VCs have been reluctant to come into Los Angeles involves management. L.A's tech companies tend to be headed by people who have brilliant ideas, but little, if any, managerial experience. And a solid management structure is a major prerequisite for investment.

In contrast, Silicon Valley has a culture of start-ups with veteran management teams moving from one good idea to another. It also has a sufficiently mature industry that generates spin-offs. Those start-ups have the name recognition and solid experience behind them that VCs desire.

With a few exceptions, L.A. tech companies simply have not been around long enough to create that next-generation experience.

"Venture capitalists complain that the area lacks a management cadre to push businesses to the next level," said Cliff Numark, from the Los Angeles Regional Technology Alliance, a general trade group. "L.A. is at the new frontier stage of young start-ups without the proven management."

Of course, it's not just L.A.'s fault. The provincial nature of many venture capitalists also plays a role. Simply put, they prefer to invest in companies in their own backyards mainly because it lets them keep a close eye on their investments and allows them to identify rising stars relatively easily.

The result is a Catch-22 VC firms don't have offices in L.A., so they're not making large-scale local investments. And since they're not seeing substantial numbers of worthwhile investment opportunities in L.A., they're not opening local offices.

It's a dilemma that can only be remedied by time. Silicon Valley is saturated with VC firms: A single street, Sand Hill Road, is home to almost the same number of venture capital firms as in all of Los Angeles County. In the years ahead, venture capitalists already in L.A. predict, more companies will trickle to the area in search of the next golden deal.

Although the gap between investment and the number of local tech companies is expected to narrow as the industry evolves, L.A. may have to ultimately accept the role of second fiddle. Silicon Valley is a phenomenon that may not be replicable.

"It's going to be a very, very long haul until we get substantially more venture capital in the area," said Bill Elkus, veteran investor and managing director of newly formed Idealab Capital Partners LP. "L.A. will never have the same entrepreneurial infrastructure as Silicon Valley. It's like Woodstock it only happens once."

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