Second Solid Quarter in Row Bodes Well for Venture Firms
By KATE BERRY
Staff Reporter
Venture capitalists turned optimistic in the third quarter with a 14 percent jump in funding to Los Angeles-based companies compared with the year-ago period, although biotech and health care firms in San Diego continued to capture the largest portion of capital in Southern California.
In L.A. County, 15 companies attracted $138.1 million in venture capital during the third quarter, up from $121.5 million a year ago, according to Growthink Research, a market research firm in Venice.
The third quarter’s showing was six percent lower than the second quarter’s $147 million in funding.
San Diego received 49 percent of all funding channeled to Southern California companies in the quarter, compared with 29 percent for Los Angeles and 19 percent for Orange County.
Venture capitalists said they believe funding levels are rebounding from the first half of this year, when the war in Iraq and an uncertain economy kept investors on the sidelines. Deal volume and pricing in the third quarter returned to levels of early 1999, when the dot-com craze was approaching its heyday.
“There’s a glimmer of light now after virtually no competition for the past two to three years,” said Timothy Draper, founder and managing director of Draper Fisher Jurvetson, a Silicon Valley venture firm with $3 billion invested in various venture funds. “We’re starting to see a few deals get snapped up ahead of
us if we don’t move quickly enough.”
Because Growthink compiles information from news reports and surveys sent to companies and venture firms, not every deal is captured in its data. Also, many firms refuse to disclose pricing, which can skew the total tally.
Semiconductor rebound
Wireless, semiconductor and some software firms received the bulk of investments in Los Angeles.
The biggest winner was Telasic Communications of El Segundo, a spin-off from Raytheon Corp. that received $35 million in its second round of financing. That was far above the average deal size in the quarter of $8.7 million.
Telasic, which has 70 patents in the design of high-performance analog and mixed-signal circuits, received follow-up financing from venture firm Redpoint Ventures and a strategic investment from Agilent Technologies Inc., the Palo Alto maker of test and measuring equipment.
“We turned away twice as much money that we could have raised because we consider equity in the company to be precious,” said John LaValle, Telasic’s chief financial officer, who said the funds will be used to beef up Telasic’s sales and marketing operations in Europe and Asia.
Over the past two to three years, most venture firms went into triage by writing off poor-performing investments in technology and telecommunications, sometimes choosing not to further fund companies they’ve already invested in.
Venture firms now want proof that a company can deliver quickly on an investment and there’s a major push to get start-ups to break even.
Many venture funds hit the wall when they were forced to write off as much as 50 percent of their investments over a two-year period. That, in turn, has caused some start-ups to simply die.
“Investors are saying: ‘Go show me you can sell a product,'” said Frank Creer, a founder and managing director of Zone Ventures in Los Angeles. “People are staying very lean and are coming into the market with a plan in place.”
Venture funds are still under enormous pressure to get returns for their limited partners, even during a period of skepticism in the market.
As a result, some venture firms are adding “pay to play” provisions to deals, which essentially force angel investors and founders to continue investing in new rounds of financing or lose their equity positions. Often the follow-up investors are getting in at a price that is lower than the original founders and such provisions ensure that equity in a company will not be diluted at the same ratio.
“Basically it’s the ‘see another day’ theory and that’s what the companies that were at higher valuations in 2000-2001 are going through because the reality has hit,” said William Woodward, managing director and founder of Anthem Venture Partners in Santa Monica.
Nationally, Northern California received the largest portion of venture funding in the third quarter with $1.3 billion, or 32 percent of the total $4.1 billion invested in 457 companies in the U.S.
Southern California ranked fifth with a total of $472 million, or 11.6 percent of the total, with investments in 54 companies. San Diego received $230 million in funding for 26 companies in the quarter while Orange County got $76.7 million for 10 firms.
“There are fewer deals in Southern California and probably more going on in Northern Cal with follow-on financings and recaps of existing companies,” said Todd Springer, a principal and managing director of Trident Capital in Los Angeles. “Some venture capitalists have pulled in their reins and are investing closer to home. In a bear market, there’s less of a willingness to go beyond your borders.”
