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Venture Funding Levels Nosedive as Deals Head South

Venture Funding Levels Nosedive as Deals Head South

By LAURENCE DARMIENTO

Staff Reporter

Local venture capital funding, which declined sharply in the fourth quarter of 2002, accelerated into a freefall during the first quarter amid a gloomy national funding picture.

Only six companies in Los Angeles County received venture capital funding for the first three months of the year, attracting a mere $22.8 million, according to the Growthink Research Southern California Venture Capital Report, scheduled for release this week.

That was a third of the $64.2 million raised in the fourth quarter and a tenth of the amount doled out in the last quarter of 2001, when $266.2 million was raised.

“Though funding continued its downward trend, the decline nationwide was nowhere near what Los Angeles experienced,” said Corey Lavinksy, president of Growthink Research.

Nationally, $4.3 billion in venture capital was raised in the first quarter, off about 10 percent from the fourth quarter and about half of the $8.1 billion raised during the like period a year ago.

“It frankly surprises me that L.A. is doing so poorly,” said Tim Buono, a principal at Tullis Dickerson & Co. Inc., a Greenwich, Conn. venture capital firm that was among the handful that invested in L.A. last quarter.

Others, though, said the decline was to be expected, and offered a host of explanations about why the county is suffering more than other regions.

After getting burned on early-stage investments

when the dot-com bubble burst, venture capital firms are now targeting later-stage firms with proven business models, or at least a proven technology. That hurts a region like Los Angeles, where Caltech, USC, UCLA and other universities have recently spun off a host of new companies.

“There are a lot of very interesting technology firms, but a lot of them are in the very, very early stages,” said Alex Suh, managing director at California Technology Ventures, a Pasadena venture capital firm.

Los Angeles long has lagged San Diego, the Bay Area and Boston in attracting venture capital funding so there are fewer companies with established relationships with firms now looking for surer investments.

“From the get-go, San Diego companies raised money from VC sources when the times were good. They have capitalized on that,” said Ahmed Enany, executive director of the Southern California Biomedical Council, an area trade association.

But Southern California didn’t do well as a whole, raising $198.7 million in the first quarter, about half of the prior quarter and only about 25 percent of the $782 million raised a year ago.

San Diego County performed the best, with 19 companies raising $122.9 million, down by only about a third. Orange County saw a decline of nearly 70 percent, but 10 companies still raised $53 million.

Among the few Los Angeles companies that did receive funding in the first quarter were Agensys Inc. and LivHome Inc., two companies that scored big in prior funding rounds.

LivHome, which provides private pay in-home services to the elderly, received $5.8 million in funding for an acquisition in a funding round that included prior investor Tullis Dickerson.

“We support the company, and wanted to put the money in,” said Buono. “It’s certainly a less risky investment.”

The company has the added benefit of generating an operating profit, allowing it to stand out in relation to start-ups.

Tough funding

But even LivHome found securing the round a challenge.

Chief Executive Mike Nicholson said the company had to struggle to maintain its valuation as investors sought a greater equity interest. “We were looking for an uptick in our year 2000 valuation, but basically had to settle for an agreement that kept it the same,” he said.

Questions over valuations are slowing down venture funding nationwide, with venture capitalists convinced they are going to go lower even as companies are unwilling to see their equity so diluted.

GeneFluidics Inc., a Monterey Park start-up developing an advanced molecular diagnostic tool, struggled to put together a funding round last quarter partly over valuation questions.

“Valuations are depressed across the board. That makes it hard for an early stage company,” said John Kibler, director of corporate development, who added that there are plans to complete the round this quarter.

Other factors cited in the overall slowdown include the trend toward funding in a syndicate of firms, which mitigate the commitment needed from venture capitalists that are having their own trouble raising money.

“You have a much slower pace because you are getting various people involved rather than just your own firm,” Suh said.

And with the IPO market just about dried up and mergers and acquisitions activity weak, the lack of a clear exit also has tempered interest in companies not previously funded.

Still, Enany said the local data might be misleading. He contended that Los Angeles has a relatively large community of wealthy angel investors who are not captured in venture capital surveys.

“People are sort of wondering how the heck the (biotech) industry is surviving. We have a unique way of funding these companies,” he said. “These figures do not take into account the $200 million or $300 million that Al Mann has put into his two or three new companies.”

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