FINANCE — Good News, Bad News on L.A. Venture Capital Deals

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Venture capital funding in L.A. County has exploded over the past year, but investments have slowed since the last quarter of 1999 and other regions are quickly outpacing L.A.’s growth, according to a new report.

Investors poured $599.3 million of venture funding into L.A. County-based companies in the first quarter of 2000, according to a PricewaterhouseCoopers report being released this week.

While that’s far more than the $232 million invested here in the first quarter of 1999, it’s significantly less than the fourth-quarter 1999 mother lode of $895.4 million, which included an enormous $280 million investment in Culver City-based CarsDirect.com.

“There was an anomalous amount of activity in Q4 that was really something of a quantum leap, so I’m not surprised to see it back off a little from that,” said Richard Withey, PricewaterhouseCoopers partner in charge of the global technology group in Los Angeles.

Such fluctuations are no cause for alarm, experts said.

“People have been oriented to increases because we’ve done so well in the last three or four quarters in fact, the last eight quarters now but I think we should not be focused on just the individual quarters. That’s dangerous thinking,” said Rohit Shukla, president and chief executive of the Los Angeles Regional Technology Alliance.

“I think there is no question, on the other hand, that there is a tightening of money,” Shukla added. “Regardless of how well the other regions are doing, that’s going to be reflected in ensuing quarters, particularly the early-stage financing.”

Lagging the competition

The report cited New England, New York City, Illinois, Georgia and Texas as areas that are growing significantly, but L.A. was left off that list. Some speculated that the types of companies that contributed so much to L.A.’s boom last year also contributed its recent decline in funding.

“A lot of the deals in the recent year or two that have gotten funded tended to be e-commerce and new-media deals, some of the companies that have been hit the hardest by the stock market and may have scared some investors away,” said Tony Hung, partner at venture capital firm Dynafund Ventures.

Withey agreed. “The stock market declining and the questioning of some of the B-to-C business models, and the market’s concentration on companies having a credible past history of profit, led the investment selection process to be a little more rigorous and selective than it has been,” he said.

PricewaterhouseCoopers’ data seems to support such assertions. It shows that retailing and distribution companies, which would include e-commerce firms, garnered 42.5 percent of local venture capital investments in the fourth quarter of 1999. Much of that is attributable to the $280 million investment in CarsDirect.com, an online car sales site. For first-quarter 2000, only 5.5 percent of the investments went to the retailing/distribution sector, the report shows.

Hung and others said they see opportunities for local companies to receive venture capital funding in non-Internet-related technology. In fact, the biggest deal of the first quarter, $125 million, didn’t go to a sexy entertainment or e-commerce dot-com, but to Capstone Turbine Corp., a high-tech micro-turbine power systems company in Woodland Hills.

That deal helped push investments in industrial companies from 1 percent of total investments in the fourth quarter of 1999 to 22 percent of investments in the first quarter of 2000.

“Infrastructure deals are going to continue growing, and L.A. is going to do well,” Shukla said.

Future strength

Wireless technologies, telecommunications, broadband networks and other technologies that provide the backbone for technological operations and devices have great potential for growth in the L.A. area. And those sectors will likely help push up local venture capital investments in the future, industry observers said.

Several sources interviewed agreed that the drop-off in local venture funding during the first quarter isn’t a sign of the bottom falling out as much as a sign that frenzied investors are coming back to earth.

“Across the board, people are a lot more cautious now,” said Michael Song, partner at TMCT Ventures. “The possibility of an IPO for most companies has closed, so they have to focus on making the cash they have last as long as possible. Cheap capital is no longer available.”

Investors demanding more bang for the buck will be healthy in the long term, Song said. “I think it’s a good thing; it’s good to see that people are going back to a rational operating basis,” he said.

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