Staff Reporter

Thanks to the growing appeal of local Internet companies, Los Angeles County received a record amount of venture capital in the first three months of the year, more than in any quarter since formal tracking of such investments began in 1993, according to PricewaterhouseCoopers LLP.

The $170 million invested in local companies exceeds the previous high of $155 million invested in the third quarter of 1998.

"The level of venture capital is telling us that this area is a place where smart money can find deals and smart entrepreneurs can find money," said Massoud Entekhabi, a partner at PricewaterhouseCoopers in Woodland Hills.

With Ventura and Santa Barbara counties added to L.A., venture capital inflow to the broader "L.A. region" reached $217 million in the first quarter. That's up from $96 million in the year-earlier quarter, and just shy of the record $236.7 million invested in the third quarter of last year.

It remains, however, a fraction of the $1.8 billion of venture funding that went to Northern California companies in the first quarter the bulk of that going to Silicon Valley compared with $404 million for all of Southern California.

Of the total first-quarter investment in the L.A. region, more than half went to Internet-related companies fueled, many believe, by the success of local companies like Pasadena-based Earthlink Networks.

"There are deals there that did not exist two years ago," said Mark Stevens, general partner at Sequoia Capital, based in Menlo Park. "It is centered around the Internet mostly in Santa Monica."

The biggest recipient of venture capital in the quarter was Santa Monica-based, which received $30 million of third-round funding., whose software allows users to download postage over the Internet, has attracted funding from some of the biggest names in venture capital, including Chase Capital Partners of New York.

Other big first-quarter recipients were Pasadena-based Internet search engine, which received $24 million, and online toy retailer eToys Inc., which got a $20 million investment. Both and eToys are preparing for initial public offerings.

"We have got a lot of IPO's stacked up," said Entekhabi. "That's going to create a buzz."

While Internet companies garnered the bulk of L.A. venture funding in the first quarter, health care companies dominated Orange County's first-quarter funding. More than 60 percent of the total was invested in health care and medical instruments companies. Only 21 percent of first quarter investment went for software.

Also, in terms of total first-quarter funding, Orange County continued to lag L.A., receiving just over $50 million, little changed from its quarterly average in 1998.

Entekhabi attributed L.A.'s growing dominance to its traditional strength in entertainment and retailing. "Convergence is here," he said. "You have the entertainment industry creating content, networking companies creating bandwidth, and customers such as e-commerce companies using both to sell their products."

Venture capitalists said that larger, out-of-town venture capital firms are showing greater interest in L.A. because the local software and information industries are maturing and in need of later-stage financing.

"There are a lot more funds around the country who prefer to be co-investors in follow-on rounds than at the start-up level," said Terry Bess, who runs the Los Angeles office of Silicon Valley Bank.

As a result, the size of local venture deals is starting to increase. The average size of L.A.'s first-quarter deals was almost $7.5 million, topping the national average of around $6 million.

Also pushing up the valuations on deals is competition among the venture firms themselves. While that's good news for entrepreneurs in the short term, it could hurt the market in the years to come.

"One of the things that people have always said about Los Angeles is that you can get reasonable deals," said Entekhabi. "But if you have to start paying a premium for deals, it might chase some investors away."

With Internet companies attracting so much attention and money, other types of promising companies might have a harder time attracting capital.

"I think there are some good technology companies out there that are not getting attention because some venture capitalists are busy looking at the Internet space," said Bess.

Most Los Angeles investments remain cheap relative to Silicon Valley deals, some sources said. And as long the stock market continues to support huge valuations for Internet-related IPOs, the VC market will likely remain willing to pay high prices to get in on the ground floor of such promising companies.

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