Venture capitalists invested $187.8 million in Los Angeles-area companies during the third quarter ended Sept. 30, a 21.4 percent decline from the previous quarter, according to Growthink Inc., a Los Angeles-based research firm.

The drop, while substantial, was not as severe as that suffered in other major U.S. markets. As a result, Los Angeles moved up to the No. 8 spot on the list of top venture investment markets. In the prior quarter, L.A. had been No. 10.

"L.A. moving up the chart is nothing we should be patting each other on the backs about because we're well off the pace we were at a year ago and even a quarter ago," said Corey Lavinsky, Growthink's director of market research. "But relatively speaking, other areas fell off worse than Los Angeles."

Specifically, Atlanta and Denver ranked No. 6 and No. 8, respectively, in the second quarter both dropped out of the top 10.

Besides Los Angeles, two other U.S. metro areas moved in the third quarter Dallas jumped from No. 9 in the second quarter to No. 4, and Austin inched up from No. 7 to take the No. 6 post.

The Bay Area remains firmly atop the heap, receiving $2.2 billion during the third quarter, down from $3.1 billion in the second quarter but still more than 10 times L.A.'s amount.

Receiving the biggest portion of venture capital in Los Angeles during the third quarter was Internet Machines, an Agoura Hills semiconductor chip seller. It received a $41 million round, of which $40 million came from Exar Corp. and $1 million came from Banc of America Securities.

"This is by far the biggest direct equity investment that Exar has made in its 30-year history," said Susan Hardman, an Exar vice president. "We're positive they'll be successful and that we'll benefit from their success."

Exar, a Nasdaq-listed company based in Fremont, Calif., looked at 30 different companies over a nine-month period before deciding to buy a 16 percent equity stake in Internet Machines for $40 million, Hardman said.

Exar plans to eventually purchase Internet Machines outright, but the Agoura Hills firm is currently burning so much cash that an acquisition would have sent Exar into the red.

"As long as we keep our investment under 20 percent, we don't have to account for any of their losses on our income statement," Hardman explained.

Networking frenzy

As for industry sectors, the hot niche during the quarter was "optical networking" essentially technologies that digitally connect computers.

Among the L.A. third-quarter recipients in the optical networking space are LightCross of Monterey Park, Sabeus Photonics of Long Beach and Zonu of Tarzana.

Meanwhile, the once-sizzling e-commerce sector remains ice cold, as does most any online content play. The closest thing to that space that got funded in the third quarter was Urban Entertainment, which uses the Internet as an incubator to develop movie and TV projects.

At least one L.A. recipient is well positioned to benefit from widening fears following the Sept. 11 terrorist attacks.

Storactive, a Marina del Rey company that received $11.7 million in third-quarter funding, develops software that continuously replicates computer files, and quickly recovers them in the event of a system crash, cyberterrorism, or other such event.

"I don't want to thump my own chest, but cream rises to the top and the cream in this case is technology," said Tony Bautista, Storactive's chief executive.

Bautista plans to hire many of his former colleagues from the Network and Systems Management Group of Seagate Technology.

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