Invest for the long term.
That's not just the mantra being pushed by personal finance experts it's the approach being taken by local venture capitalists, who are calmly staying the course.
In fact, they remain relatively bullish about their financial futures.
"Venture capital is more of a long-term play," said Jim Liao, general partner at DynaFund Ventures, a $60 million Torrance-based fund that invests primarily in technology and Internet start-ups. "Short-term fluctuations do not bother us."
Added Brad Jones, general partner with Brentwood Venture Capital in West L.A.: "We don't see the flow of opportunities fluctuating with the market. It doesn't change our strategy at all."
Far from it. Rather than retreating, Jones is rushing forward. His firm has received $600 million in commitments for its latest fund, far more than the company can properly invest. As a result, Jones plans to actually accept only $300 million of those commitments. He intends to plow as much as 40 percent of the fund into Southern California companies.
"We're seeing a big increase in the number of opportunities here," Jones said.
Other investors apparently agree. After years of relative drought, venture capital has been streaming into the region in recent months. For the first half of 1998, $547 million was invested in Southern California companies, up from $411 million for the like period in 1997 an increase of 33 percent, according to PricewaterhouseCoopers. Los Angeles companies received about $200 million in venture capital investment during the period, almost double the amount in the like period last year.
Nationwide, a record $6.9 billion of venture capital was invested in the first half of 1998, compared with $5.6 billion for the like period a year ago. The average size of those deals climbed from $4.4 million to $4.9 million over the like period.
Massoud Entekhabi, a partner in PricewaterhouseCoopers' global technology group, said a period of prolonged market volatility or even an economic slowdown would do little to affect that flow.
"The bottom line is, there is more money available for venture capital investments than ever," said Entekhabi. "There is a tremendous amount of capital looking for the right kind of deal."
Why do venture capitalists remain so bullish? A lot of it has to do with the rhythms of their investments. A venture investment made today is not expected to post any significant returns for at least three to five years, at which time the company is mature enough to stage a so-called "liquidity event" that is, a public stock offering, merger or outright sale, which generates cash for investors.
Brentwood Venture Capital, for example, warns its investors mostly pension funds and high-net-worth individuals that they should not expect to see a dime for at least three years, according to Jones. And the majority of the firm's investments do not distribute returns for between four and seven years.
"Our criteria are to invest in companies with a strong product, strong management and a solid long-term outlook," said Jones, who specializes in information technology, health care and biotech firms. "We tend to ignore short-term fluctuations."
In fact, Jones added, such short-term turmoil actually can work in a venture capitalist's favor, as large investors in search of big payoffs shift funds from the stock market to VC funds. "A lack of enthusiasm for the public market makes them more willing to go into private equities," he said.
A topsy-turvy stock market does impact venture capital firms in one important way by virtually slamming the door on IPO activity. Already, 1998 has been an extremely slow year for public offerings, and many VC firms are shying away from companies with an eye toward going public in the near term.
"Because of short-term problems, the IPO market is not attractive at all," said DynaFund's Liao. "Today, I would not be inclined to put money into a pre-IPO round (of financing)." Instead, DynaFund is looking for mid- and long-term opportunities, he said.
But even that negative short-term outlook for IPOs has something of a silver lining. If the IPO is no longer an attractive exit strategy, a growing number of firms are opting for outright sales or mergers which, according to investment bankers, are occurring at a record pace and generating strong returns.
"It's been a terrific year for mergers and acquisitions, and these deals are throwing off cash to investors even faster than IPOs," said Entekhabi.
Still, some caution probably is in order, especially as the economic turmoil in Asia, Latin America and Russia begins to ripple through the U.S. economy, said Jack Kyser, chief economist of the Economic Development Corp. of L.A. County. "People are going to become very, very cautious," Kyser predicted. "There are a lot of wildcards in the air."
Even generally bullish VCs like Jones tend to agree. But he nonetheless appears to be taking such developments in stride.
"Many investors have been expecting a pullback for a long time. This is not a surprise to anyone," he said.
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