With investors fleeing tech stocks, industry giants reporting dismal third-quarter earnings and venture capitalists re-branding themselves as mergers-and-acquisitions experts, the Business Journal convened a panel of tech industry experts to get a look at where the industry is headed.

While L.A.’s tech sector has not escaped the industry-wide pain, the local damage is nowhere near as severe as that suffered in the Bay Area, Seattle and elsewhere.

Joining the Business Journal were Alec Gores, founder of Gores Technology Group; Michael Montgomery, co-chief executive of Digital Coast Partners; Gary Gabriel, founder of new-media company Vmatrix Communications; and Elisa Williams, technology reporter for Forbes magazine.

Gores Technology is a Los Angeles firm specializing in acquiring under-performing tech companies. It’s best known for having taken over the badly hemorrhaging Learning Co. from Mattel Inc. Digital Coast Partners is a Santa Monica-based investment bank that advised on $250 million in transactions last year. Vmatrix is a Los Angeles new-media marketing firm focused on creating streaming video solutions for businesses.

Question:

What’s in store for the region in the upcoming months? Let’s have the good, the bad and the ugly.

Gores: I think mostly people are trying to get their house in order. Most companies are having a lot of trouble growing, making progress. Some companies will survive and some companies won’t.

Montgomery: We’ve seen a tremendous upsurge in people contacting us about selling their companies, with much more realistic expectations of what they’re really worth.

Most of the funding that has occurred is existing investors re-upping into their companies at crammed-down values. So the entrepreneur knows what’s coming because, unfortunately, most VCs are quite blunt about it. If you can’t operate with the money you’ve already got and you have to come back and ask us for more, it’s going to be very painful. Frankly, a lot of other companies come to the realization that they just don’t have anything else and close down.

Question:

Have you noticed a difference between L.A. and other technology centers up the coast?

Montgomery: I have to tell you that the climate in L.A. is much better than other places. I know it may not seem great, but boy, you go up to Seattle and it’s just sad the Silicon Valley it’s a whole different world, like walking zombies up there.

Williams: I’ll just focus on some of the positives that L.A. has going for it. It’s not dependent on one industry, which helps. Then also, you’ve got a couple of pockets of optimism we’ll see if it’s misguided optimism or not over the next couple of quarters. The game business, for example. They’re looking for a fourth quarter where they’ll benefit from Sony making a play and perhaps dropping its price, which would generate some spending. You’ve got the wireless community that believes there’s some momentum for people to upgrade the devices they walk around with.

The manufacturing sector in the northwest I travel to Portland frequently that’s just wiped out. Even through the good times, they were skating by and clearly their weaknesses became apparent after things started to slow down.

Question:

What kind of manufacturing?

Williams: The chip business is really taking a hit. Largely, anything that was in a cyclical industry that’s now in a dip won’t recover for a while. The people that do seem to be doing well are the people in the innovation business. If you’re selling the gold digger the pick, you’re probably going to do well in good times or bad.

Question:

Doesn’t a lot of this stem from questionable business models? Should we have been anticipating this kind of falloff?

Montgomery: It’s so easy to look in the rearview mirror and say, “We all should have seen it.” When something looks good, a whole bunch of people keep coming in. The first one usually has some advantage. The problem is that the fourth and fifth people getting funded are chipping away at the same market, and it’s a real battle. We were big in the DSL market when it started, and my god, what a nightmare.

Gabriel: If you’re involved in a start-up and you’re offering something fresh to the marketplace, you’re focusing on customer acquisition and revenue. And we believe that maybe in the spring, when the venture capital market improves slightly and new opportunities are looked at, we’ll be approached because by then we’ll have deals with some very big players. So I think from an entrepreneur’s perspective, it’s still an exciting time.

We’re not as consumed by constant revisions of our business plan, which a year ago took up maybe half of our time. Now, maybe it takes up 15 or 10 percent of our time because we’re focused on getting the customers. And of course, ever since the Sept. 11 tragedy, getting customers for anything you’re doing has been difficult. We were in the middle of some very big deals for our company, and those deals had to be postponed because of budgetary freezes.

Question:

Alec, this is a pretty busy time for you in terms of opportunities to grab at companies that may be undervalued.

Gores: What I saw the last couple of years was way too much capital it was too easy. I saw these guys go out and raise a lot of money who really had no experience to build businesses but they had a lot of experience raising money a lot of investment bankers. It was too easy to go out and raise $20 million, $30 million, $100 million for projects that didn’t make sense on paper, but people were willing to do it because they’re in the venture capital business and wanted to throw money at it.

Going back to your question, what we’ve seen is big companies that buy something they think they can just throw money at and see grow, and they end up screwing it up. It’s the same mistakes, and people just keep doing it in good times or bad times. So now what’s happening is that people are coming to reality. A lot of people are looking at themselves and saying, “What are we good at? And that pushed a lot of business for people like myself in the marketplace.

Question:

Your experience with buying The Learning Co. from Mattel is a great example.

Gores: Yes. A lot of people now say, “If I knew Mattel was going to give you the company, we would’ve bought it.” And I say, “Go at it.” It’s not that easy. These are very tough situations that we find ourselves in and we do them because nobody else can do them. And I like tough things. I like things that are just a mess, that nobody else can figure out. The messier the better.

Gabriel: What’s happening is a separation from the entrepreneur and the opportunist. Those who are still in the market working and toiling, those are the entrepreneurs the people who are in it for the game, not for the quick exit.

Gores: Right. Our first order of business is to have a good business, whatever that is. We want to have a good solid foundation, have good people that want to be there. If you have a business, whatever the revenues are, you have to make money. And if you want to grow, you’ve got to find a way to fund it internally that’s the first message. You don’t just go out and borrow money. You just have to figure a way to grow it within.

Question:

You mention customers, the importance of getting back to the core business. How does that work?

Gores: I’ll go back to one of my earlier companies I bought in the software business. They were losing a lot of money, spending a ton of money on development, and they had this poor customer base that had been with them for 10 years. And they were developing this supposedly great product. And they decided it wasn’t a core business. So they’re developing these things, and nobody’s talked to a customer. And nobody’s paying attention to the existing customers. So we immediately formed customer groups they became part of our development group for our future products. You get all of these smart people at a roundtable with a bunch of our smart people, so you get a lot of knowledge.

Question:

Gary, how are you reaching out to your customers?

Gabriel: Organically, through word of mouth. No advertising. Just getting a customer that loves our services. And that customer tells a friend of his. Of course, if we had a marketing budget, we’d spend some money on marketing, but not much because we like the way we’re growing now.

Montgomery: Most of our business is also word of mouth from a client who is happy and tells another one.

Question:

It’s interesting that marketing was so overused in the ’90s.

Williams: I would meet with start-ups that had high-dollar PR people and they didn’t have a business plan.

Montgomery: Of course, those people are out of business now.

Gabriel: Paying them a $10,000 monthly retainer just to show up with you at a breakfast with a reporter.

Question:

It seems like a lot of VC firms are now changing hats. They’re getting into LBO firms or M & A; shops, or they’re acting as business brokerages.

Montgomery: We’ve been doing investment banking since ’86, and the first business was all in the bank, and then it went more toward funding because that’s where the activity was. That’s because there wasn’t a whole lot of M & A.; People would get money and go public. So, about a year ago, we woke up and said, wait a minute, this funding doesn’t make any sense. And we literally dropped all of our clients by the end of the year and decided we had to be more of an M & A-focused; bank. And I think it’s turning out to be absolutely the right decision. We’re busy. We probably couldn’t take on another client.

Question:

Did you liquidate your equity positions at that point?

Montgomery: No, we still have a little fund. But we didn’t invest for almost nine months. Our mantra at the investment committee meeting was, “Would we put our own money in?” And there wasn’t one investment made for almost a year. We just kept saying, “This just doesn’t make sense.”

Question:

L.A.’s tech sector tends to be very diffuse, involving a lot of small to mid size businesses. Does that serve us better than having a lot of giant companies?

Montgomery: It has served us extremely well. This is an incredibly diverse economy. Yes, there are people suffering, but these companies are resilient. There was a boom and bust up in Seattle. People are totally disillusioned with what happened and came out of college and their expectations were way out of whack. I don’t think L.A. had anywhere near as much of that problem.

Gabriel: One big advantage of being small is you’re more nimble. If we had a huge position in the marketplace, it would’ve been more difficult. You can adjust your businesses and your prices, which we’re doing every other day, depending on the client we’re talking to. You can approach different markets with a different price point.

Gores: A lot has to do with private vs. public. We have companies that are $1 billion in revenue, but we still run them like $10 million companies back to basics, quick decisions, putting real businesspeople in place, vs. a public company that tends to focus on a lot of the wrong things. They all tend to want to grow 30 percent, even if it doesn’t make sense.