Tougher competition for deal flow in 2004 and a flurry of year-end investments are signaling that 2005 may be a robust year in the venture capital market.
Two local deals in December illustrate the point: eBay Inc.’s $415 million purchase of Santa Monica-based Rent.com and a $110 million investment in Pasadena-based eHarmony by two venture firms.
Though 2004 has been characterized as a turnaround year, VC investors seem confident that the pall hanging over the venture community since the dot-com bubble burst in 1999-2000 has lifted. Money continues to flow from large institutional investors who are chasing higher returns from riskier asset classes.
Moreover, the higher stock market has helped create so-called “liquidity events,” allowing VCs to exit investments they made in start-up companies several years ago by being bought out.
“It’s been quite strong in 2004 with a dramatic shift in activity,” said Jim Gauer, general partner at Palomar Ventures in Santa Monica. Palomar experienced strong demand for its third fund, Palomar Ventures III, which was oversubscribed when it closed in October with $225 million. Gauer said the goal was to raise $150 million to $200 million.
“There’s a feeling that the Southern California market is underserved by VCs, so activity has picked up,” he said, adding that big institutions view Los Angeles as a way to diversify out of Silicon Valley, where the cost of investments has jumped dramatically.
Like most venture firms, Palomar’s role is similar to that of a talent agent in the movie business. The company helps spruce up young companies, often as part of a syndicate of venture capital investors. They will help beef up management and strategy with the aim of selling the company at a higher price later on.
Palomar’s investors, or limited partners, include the California Public Employees’ Retirement System, the University of California and JP Morgan Chase & Co.
Numbers tracking venture capital activity in the fourth quarter will not be released until mid-January. For the third quarter, venture-backed firms in Southern California raised $502.2 million, a 19 percent jump from the $407.5 million in the April-June period, according to VentureOne and Ernst & Young. Investment activity was up 4 percent from the third quarter of 2003, when local firms raised $482.1 million.
