Venture capitalists were bullish on Los Angeles in the first quarter of 1997, as L.A. County firms received more venture capital than either Orange or San Diego counties.
At the same time, the market for L.A. County initial public offerings cooled off considerably in the first quarter, reflecting a recent investor preference for blue-chip stocks over more volatile small-cap shares.
Twelve L.A. firms received nearly $66 million in venture capital for the first three months of 1997 nearly three times the figure for the first quarter of 1996 according to a survey by Coopers & Lybrand LLP.
By comparison, Orange County firms received $41 million in venture capital for the first quarter, and San Diego firms received $40 million.
L.A.’s boosted numbers come at a time when national venture capital investment remains relatively flat, according to a recent report by VentureOne Corp. of San Francisco. VentureOne said that first quarter venture capital investment nationwide totaled about $2.59 billion, about the same as the first quarter of 1996.
L.A. usually trails San Diego in venture capital funding, and frequently is upstaged by Orange County. Last year, L.A. County received a total of $305 million in venture capital funds, trailing San Diego’s $375 million but beating Orange County, which received $172 million.
“L.A. is coming to its own. There’s a lot of capital chasing good deals here,” said Massoud Entekhabi, the partner in charge of Coopers & Lybrand’s Southern California high-tech group.
“I’m hoping this is a trend that’s going to continue. A challenge we face is attracting investors to L.A. as a good place for venture capital investment,” he said.
Indeed, L.A.’s media and entertainment industries finally may be attracting a long-predicted wave of venture capital to the area, according to Harry Lambert, a general partner at InnoCal L.P., a Costa Mesa-based venture capital firm. InnoCal invested in three of L.A. County’s 12 venture capital deals in the first quarter.
Two of those Cloud 9 Interactive of L.A. and Geocities of Santa Monica combine high-tech and entertainment expertise in multimedia products. Cloud 9 makes CD-ROMs for children, while Geocities creates virtual communities on the Internet for people with common interests.
InnoCal’s third L.A.-backed firm Trivida Corp. of Redondo Beach is a high-tech company that makes data management software for corporate networks.
“L.A. is coming up, and companies like Geocities are representative of media and technology meeting,” Lambert said. “It’s logical that the confluence of technology with media and entertainment will produce this kind of company.”
While venture capitalists were busy in L.A. during the first quarter, just the opposite was true for firms making initial public offerings.
Only five L.A. County firms made IPOs in the first three months of 1997, compared with nine such offerings in the last quarter of 1996 and seven in the like period a year ago, according to Crowell Weedon & Co.
Furthermore, share prices for three of the five first-quarter IPOs have dropped substantially since reaching the market, compared with only one out of nine that dropped after the fourth quarter last year.
The cooler reception to Los Angeles IPOs reflects increasing caution among investors for small-cap stocks, said Crowell Weedon partner Tim McQuay.
“A much larger percentage of IPOs nationwide have gone public at prices at the lower end or less of their offering range from when they were filed,” he said. “That’s an indicator that buyers are being more selective now than before.”
Indeed, recent IPO offering prices indicate that investors are less willing to pay a premium for new shares than they were just months ago, said Peter Griffith, managing director of securities brokerage Wedbush Morgan Securities.
He added that Wall Street’s recent rally has yet to bolster IPO prices, though continued gains could eventually shore up the IPO market as well.
Of the six California IPOs last month, all sold at prices below their original offering range, said Griffith.
He cited Meade Instruments Corp. of Irvine as an example. Meade’s IPO was originally filed at $8 to $10 per share, but it was finally priced at $7 when the company went public on April 8.
“You’re seeing progressively stronger pricing pressure on small cap stocks,” said Griffith. “People are saying ‘I don’t want to buy these, so if I buy them they’re going to have to be on sale.'”
Both Griffith and McQuay agreed IPOs could be a tougher sell in the months ahead, and that the first quarter could well set the tone for all of 1997. That declining interest in IPOs could consequently lead to a groundswell in private capital placements this year, as companies grow with the aid of private funds and wait for public IPO markets to improve, Griffith said.
In a more positive trend for L.A., Griffith pointed out that out of 27 California IPOs so far in 1997, 60 percent were from Southern California companies.
“This is the first time I’ve seen it where Southern California beat out Northern California over a four-month period,” Griffith said.
He said Southern California has grown especially on the strength of media, entertainment and real estate company IPOs.
“In terms of real estate and entertainment, we’re the cat’s meow down here,” Griffith said. “It could be an aberration (that Southern California IPOs are outpacing Northern California), but there are a lot of opportunities down here if media and real estate remain attractive.”
