After steadily heating up as a destination for venture capital investments in recent years, Los Angeles has suddenly cooled dramatically, according to a just-released report by local research firm Growthink Inc.
The $436.9 million that venture capitalists invested in L.A.-area companies during the first quarter ended March 31 represents nearly a 40 percent drop-off from the $720 million invested during the prior quarter.
And in terms of the number of local companies getting funding, the 33 L.A. recipients in the just-completed quarter is about 30 percent fewer than the 47 local companies that got funded in the fourth quarter of last year.
“A number of venture capital firms are without any money and no longer have the ability to fund these companies, or what money they do have is being used to support their current investments,” explained Paul Nadel, president of East West Venture Group, a local venture firm. “You also have funds that are holding their money to see where the new trends emerge.”
Despite the dramatic decline and the region’s slowing economy, Dave Lavinsky, president of Growthink, said Los Angeles remains an attractive place for startups and investors.
“The slowing economy should play little role on funding for the rest of the year,” according to Lavinsky. “Venture firms will continue to fund projects, realizing it takes 18 to 24 months to take a company public, and by that time the public markets will have changed from where they are today.”
Lavinsky said the region’s skilled workforce and the wealth of manufacturing and entertainment companies would continue to spin-off new technologies and attract investors.
“Los Angeles has a highly skilled and educated workforce,” he said. “We are also the entertainment capital of the world. The Internet is a communications medium, similar in ways to television and film. Los Angeles businesses understand communications media and can leverage their knowledge against other technology regions.”
Diverse applications
Plenty of U.S. corporate giants seem to concur with those views, seeing as they were active investors in the L.A. market during the first quarter. Among them are IBM Corp. and GE Capital Equity Group, the $5 billion private equity arm of Stamford, Conn.-based General Electric Co.
GE participated in two local first-quarter fundings totaling $23 million, though it declined to disclose what portion of that combined amount it invested. According to Growthink, GE Capital Equity was among the more significant first-quarter participants.
Its investments were in Tornado Development Inc., which develops products for Internet and wireless networking systems, and WhatsHotNow.com, a company that designs and runs official online stores for entertainment and sports brands.
GE Capital Equity was one of several investors, along with Thomas H. Lee Putnam Internet Partners and Citibank Ventures, that participated in an $18 million fourth round of financing for WhatsHotNow.com in January.
GE Capital Equity officials said the company is merely an investor in WhatsHotNow.com and would be not involved in running the Marina del Rey-based company’s day-to-day operations.
WhatsHotNow.com has two businesses WHN Solutions, serving broadcast and cable television networks like ABC, NBC, MTV and Comedy Central, and WHN Exchange, which collects online orders for licensed merchandise for small- and mid-sized businesses. The orders are then distributed to individual retailers during the fulfillment process.
Robert Fried, CEO of WhatsHotNow.com, said the majority of the funding would be used to pay off debt and improve the WHN Exchange side of the business.
Sole investor
In its other first-quarter deal, GE Capital Equity was the sole investor in a $5 million round of financing for El Segundo-based Tornado.
Jeff Scheinrock, Tornado’s CEO, couldn’t be reached for comment last week, but in a statement said the investment would give the company the opportunity to pursue new domestic and international sales markets and strengthen its position in so-called unified messaging technology.
“While the capital investment will increase Tornado’s financial resources, the full promise of this relationship lays in GE (Capital) Equity’s strategic alliance and as an invaluable entree to new business opportunities,” Scheinrock said in the statement.
While dot-com fever has turned into a flat line over the past year, several Los Angeles-based Internet businesses nevertheless received additional rounds of funding during the first quarter.
Among them were IFilm Corp. and LowerMyBills.com, which received a combined $17 million in financing, according to Growthink.
IFilm, a provider of films online, said the additional $10 million in financing will be used to fund existing business operations. Investors in the latest round include Yahoo Inc. and Leo Hindery, former chief executive of Global Crossing Inc., among others.
The privately held company also offers an online information site, IFilmpro, aimed at writers, directors, producers and others in the film industry.
LowerMyBills.com, which allows users to compare costs for a variety of services, raised $7 million in funding last quarter. Minneapolis-based St. Paul Venture Capital led the round, while eCompanies Venture Group in Santa Monica, which pledged almost $4 million to jump-start the company a year ago, also participated, along with several other companies and individuals.
The Los Angeles-based company offers customers a free service whereby they can compare costs for everything from wireless phone service to utilities. LowerMyBills.com claims it has saved 100,000 consumers more than $25 million since its inception in April last year.
