L.A. Venture Deals Slump At Year-End

By ANTHONY PALAZZO
Staff Reporter

Venture capital fund-raising activity continued to plummet in greater Los Angeles during the fourth quarter, according to new data from research firm Growthink.

Only 16 L.A.-based private firms managed to raise equity of $300,000 or more during the fourth quarter, down from 21 in the third quarter, said Corey Lavinsky, Growthink's director of market research. The total amount raised fell to $104 million from $189 million, he said.

Los Angeles' lack of staying power is due partly to its reliance on media-related start-ups amid the recession-led advertising slump.

"We tend to be more in media and digital media; those areas are very weak and are of limited appeal to venture capitalists," said John Morris, a partner with GKM Ventures in West Los Angeles.

Nationwide, the picture was mixed. The number of companies receiving funding in the fourth quarter rose to 760 from 702 in the third quarter the first sequential rise in nearly two years, Lavinsky said. However, the total amount invested still declined, to $8.1 billion from $8.3 billion in the period.

L.A.'s numbers are noteworthy given a venture rebound in the rest of Southern California.

Region-wide, 64 companies raised $681 million in the fourth quarter, compared with 58 companies raising $643 million in the third quarter. San Diego, home to numerous biotech and wireless communications start-ups, led the recovery with a 50 percent increase in equity raised, to $342 million for the fourth quarter from $230 million in the third quarter. Orange County also did well, with a 45 percent sequential gain, to $206 million in the fourth quarter. (Growthink does not have data for the fourth quarter of 2000.)

Nurturing existing investments

"In the fourth quarter, there were a lot fewer new start-ups receiving money," Lavinsky said. "A lot of investors were taking care of companies in their own portfolios."

Indeed, the experiences of the two L.A.-based companies receiving the most funding in the fourth quarter bear out trends toward biotech and portfolio tending.

Biotech start-up Clearant Inc., based in West Los Angeles, raised $20 million in a first-round deal that is just winding up, said its chief executive, Terren Peizer.

"We were pretty pleased," Peizer said. "I am told by all the VCs that we were an exception. I think that's based on our perceived short time to revenues, and our diversification of revenue mix."

Clearant has developed a gamma ray based technology to kill bacteria and viruses in tissue and blood products that are used in medical procedures, such as transplants. "We have the only technology that exists that can effectively sterilize biologic material without denaturing (altering) the underlying biologic product," he said.

This year, the company wants to commercialize its first application, for tissues, with commercialization of other applications through 2005.

Despite these strengths, Peizer said the deal originally set to close around Sept. 11 was delayed a few months, as VCs renewed their focus on portfolio companies. "It was an environment where venture capitalists did a lot of extra due diligence," he said. "They weren't looking at new companies with much enthusiasm."

In general, venture capitalists have become cautious since Sept. 11.

"In today's environment, everyone's seeing the same deals, and they're calling each other much more frequently," said Alex Suh, managing director of Pasadena-based California Technology Ventures. "One we're doing due diligence on now is coming back negative with some of the other VC firms. We're agreeing, so we'll probably pull out of it."

The local company raising the second-largest amount of money in the fourth quarter was iSuppli Corp. of El Segundo. The fifth-round deal, led by NeoCarta Ventures of San Francisco, pulled in $11.25 million, said John Zimmerman, chief financial officer of two-year-old iSuppli.

"The market was a disaster," he said. "We were lucky because we have investors who really believe in the company." Those investors have invested a total of $63 million in iSuppli, an information, consulting and technology company focused on electronic component procurement. Isuppli is still using cash, Zimmerman said, but it is on track to become cash-sufficient by the end of 2002.

Outlook not bright

Looking forward, it won't be a lack of cash that will prevent venture activity from resuming in L.A. even though a couple of local operations, including the Idealab incubator and San Vicente Group, are returning unspent capital to investors.

Rather, it's a question of maturity.

In the media/convergence sector, the technology still isn't there to support, for example, a full-scale rollout of interactive television, Morris said. "It's still in early-adopter phase," he said, pointing to a restructuring, announced last week, of Microsoft Corp.'s Ultimate TV division.

Additionally, Morris said, L.A. still hasn't figured out how to commercialize the wealth of technology that resides in its defense- and aerospace-related companies. This is partly due to the lack of a tight-knit, well-oiled network of investors, entrepreneurs and management talent that exist in Silicon Valley and in San Diego. "There's great concentrations of technology in Southern California but it really hasn't been mined very successfully," he said.

For reprint and licensing requests for this article, CLICK HERE.