Venture capital investment in L.A.-area companies slowed during the third quarter and was focused almost entirely in and around the San Fernando Valley.
A total of 10 L.A. County companies received $34.7 million in venture capital during the July-September quarter, down from $58 million in the second quarter and $50 million in the year-ago quarter, according to Coopers & Lybrand LLP.
Despite its tremendous size, L.A. lags behind Orange and San Diego counties in total venture capital investment. Orange County companies received $68 million in third-quarter venture capital investments; San Diego companies got $103 million.
And the entire region, which received 41 investments for a total of $206 million, still falls short of the $921 million that Silicon Valley received in venture capital investments during the third quarter.
“Our venture capital base is still getting established here in Los Angeles,” said Karen Gier, manager of Coopers & Lybrand’s high-technology practice. “We still need a critical mass of activity to start a snowball effect as we see in places like Silicon Valley.”
The tremendous sprawl of Los Angeles, she said, is a factor that works against local companies obtaining venture capital.
“Venture capital investors like to work in small areas with high concentrations of companies. It’s much easier to get around the pitch circuit,” she said.
The preference of venture capitalists for Silicon Valley was brought home to Paul Singh, president of Westlake Village-based Onebox Networks Inc., a supplier of computer networking products. Singh, who helped found the company last year, attended a venture capital forum put on earlier this year by the Los Angeles County Economic Development Corp. and the Los Angeles Venture Forum.
“If there was a company with similar technology in Silicon Valley, it seems they got brownie points just for being in Silicon Valley,” Singh said. “It’s harder to get venture capital down here.”
Ultimately, Singh was successful; his company received a $3.5 million investment from Amerscan Partners during the third quarter. Singh said the money will be used to expand product development and sales and marketing efforts.
Onebox Networks was one of three Westlake Village companies to receive venture capital during the third quarter. Two other companies in nearby Woodland Hills and Canoga Park also received venture capital.
Together, these companies are part of an emerging technology corridor that generally runs along either side of the Ventura (101) Freeway through the western San Fernando Valley and Conejo Valley.
“It’s becoming more like the Irvine Spectrum in Orange County,” said Brad Jones, general partner at Brentwood Venture Capital, referring to the decade-old technology park in south Orange County.
Los Angeles proper has seen much less activity, he said.
In fact, of the 10 L.A. County companies receiving venture capital during the third quarter, only one is south of the Santa Monica Mountains: Trivida Corp. in Redondo Beach. One other, Earthlink Network Inc., is in Pasadena. All the rest are either in the San Fernando or Conejo valleys.
Overall, Jones said, the relatively small amount of venture capital investments is not due to lack of available capital, but a lack of quality companies that venture capitalists feel comfortable investing in.
Jones’ Brentwood Venture Capital actually had to close its Brentwood Associates VIII fund on Dec. 30 at $160 million.
“We had commitments for over $250 million in funding, but were forced to turn away a lot of people,” Jones said. “The $160 million gave us enough money to last three years.”
Of the 10 third-quarter L.A. deals, six were high-tech companies that drew a total of $15.5 million. The companies range from Burbank-based All Post Inc., a post-production house, to Westlake Village-based Real Select, which provides online real estate listings.
In dollar terms, the single largest investment was the $12.5 million made by Capstone Ventures in Woodland Hills-based Preferred Health Management, which provides management services for radiology physicians.
Only one of the 10 companies is in the retail sector: College Enterprises, which operates Kinko’s-style copy centers on college campuses and manufactures college I.D. cards.
Half of the 10 companies received venture capital investments for the first time; the other half received follow-on venture capital investments, including one repeater from the second quarter: Westlake Village-based Litex Inc., a maker of auto emission controls.