The closest Los Angeles comes to the “big time” of venture capital is Brentwood Venture Capital, the only local firm to make it into the top 30 venture capital firms in the country.

Brentwood Venture pores through 2,000 proposals a year to find a couple dozen or so to fund. (It invested $49.1 million in 27 deals in 1996.)

Most of those selected for funding will eventually be offered up to the public through an IPO or sold off to a larger, more established company. And every so often, an investment mushrooms into a financial bonanza.

Brentwood Venture’s biggest bonanza to date has been Calabasas-based Xylan Corp., which went public last year at $26 a share and skyrocketed to as high as $76.

Of course, it didn’t stay there; last week it was trading at about $15 a share. Still, Brentwood’s initial $4.5 million investment has grown to $225 million, based on the value of its current holdings and what it realized after distributions to investors, said G. Bradford Jones, general partner in Brentwood Venture’s L.A. office.

He added that the long-term outlook for Xylan remains positive. “Investors are worried about the networking segment, it’s very competitive and they’re all way off their highs,” said Jones.

The early and dramatic success of Xylan and others like it have given Brentwood a high profile in California’s high-tech and health care sectors.

In its 25-year history, the firm which also has offices in Menlo Park and Newport Beach has become “one of the main sources of venture capital in Southern California,” says James Stancill, professor at USC’s Marshall School of Business. “They have hired some very qualified people and consequently conducted themselves well and made some good investments,” he said. “They are a very well-known factor in California.

Being a “well-known factor,” Brentwood is able to take advantage of the favorable climate created by the booming stock market, said Stancill. “Success breeds success in this business,” he said. “There’s such a demand to get money in good hands that if you can make a success story, they’ll be standing in line to put money behind you.”

Brentwood investors most of which are institutional in nature, such as pension or university endowment funds that invest anywhere from $1 million to $19 million have earned a 58 percent net rate of return, compounded quarterly, since 1989, said Jones.

So an investor putting up $100 in a Brentwood fund would have $158 at the end of one quarter, $250 million after two quarters and so on. In short, investors’ returns have been tremendous.

Not all of the firm’s investments pan out, but most end up being profitable.

For example, of the 27 new investments made by Brentwood between 1989 and 1993 (a group of investments known as the Brentwood Associates V, because it was the firm’s fifth fund), 15 went public, eight were sold to larger companies for a profit and four were written off as bad investments.

Brentwood’s partners are currently working on the company’s seventh fund.

Investors aren’t the only ones looking to get a piece of Brentwood. Start-up companies are clamoring for attention, sending several proposals across the desks of the firm’s partners every day.

“We needed a lot of cash and because of the prestige Brentwood carries, it helped bring in other venture capitalists,” said Xylan spokesman Doug Hill. “They aggressively supported a strategy of building a very comprehensive set of products and a comprehensive set of sales channels, (both of which were) needed to eventually allow us to do an IPO.”

The five general partners at Brentwood all in their late 30s to early 40s each apply a different expertise to find those companies that need a monetary boost to hit the big time. “We get 2,000 proposals a year and take a closer look at about 500,” said 42-year-old Jones, who has been with the company since 1981 after graduating from Stanford University with an MBA and law degree. “We do more in-depth work on 50 to 80 of the proposals, and of those, we might invest in 15 to 20.”

Many of the proposals that end up on Brentwood’s desks come directly from the start-ups themselves. But the most important resources for information on companies, said Jones, are professional relationships the firm has developed with attorneys, accountants, investment bankers and executive recruiters. (Recruiters often know if a start-up company is looking for seasoned management to expand operations.)

The types of companies Brentwood chooses to back rarely fit the stereotypical start-up of guys developing a product in their garage. “That’s the image, but that’s not how most deals are done,” said Jones.

Instead, Brentwood looks for a young company with a management team that already has experience in running a large company or a division of a large company. Brentwood’s partners also determine whether the technology envisioned or developed by the start-up is unique and “protectable,” meaning that it would either be difficult for others to develop or can be patented.

The task of making these determinations has become highly specialized, given the increasing competition among venture capitalists, said Kip Hagopian, who, along with Fred Warren and Timothy Pennington, founded Brentwood.

“The three of us were generalists,” said Hagopian. “Now if a medical device company comes in, one of our partners can size it up immediately compared to what used to take us days or weeks. This is important because the market’s so competitive that when you find a good deal you have to react quickly.”

Another significant difference has been a shift in geographical focus, said Hagopian. “When we started out, most of our investments were in L.A.,” he said. “The center of the practice of the firm has moved to the Silicon Valley.”

Jones is now the only general partner in L.A.; three general partners (along with two part-time partners) make up the Menlo Park office.

Jones estimates that L.A. companies now make up only about 25 percent to 30 percent of the firm’s total investments.

Jones predicts that the emphasis on the Silicon Valley will continue because of the area’s high concentration of fast-growing technology firms with plenty of upside potential.

Another Jones forecast: Brentwood’s assets will grow at about 15 percent a year. This will keep pace with the rate of the last five years when the firm’s assets under management roughly doubled to its current $400 million.

Like the start-ups Brentwood looks to invest in, the amount it holds in assets creates a barrier to potential venture capitalists looking to get into the market. “It’s hard to start a firm if your name is not known,” said Jones. “Additional money will usually go to the well-established firms.”

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