Business Is Booming, so Where’s the Money?

Venture capital investments in the nation kept up a record pace in the third quarter while remaining flat in Southern California, further proof for entrepreneurs who complain that the region is a virtual Mojave Desert when it comes to this key source of investment capital.

Southern California companies received $206 million in venture investments for the third quarter, not even a third of the $921 million invested in Northern California enterprises during the same period, according to data from accounting giant Coopers & Lybrand.

And only $34.7 million was invested in 11 Los Angeles County businesses in the three months ended in September, compared with $68 million in 11 Orange County firms and Enterprises Are$103.3 million in 29 companies in San Diego County, according to the data.

“This is a call to action,” said Barry Wilson, chief operating officer of EC2, the Annenberg Incubator Project at USC in Los Angeles. “If we’re really looking to be a high-growth region, new companies have to be getting funding. Successful companies breed more successful companies.

“It can’t be just entrepreneurs pushing on the door,” he added. “People have to be on the other side welcoming them in to sources of funding.”

Although Los Angeles County is in the midst of a small-business boom, this won’t necessarily draw venture capital.

According to Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County, many of the new companies are small or home-based businesses and aren’t candidates for venture capital.

“While we’ve got a surge in small businesses, they are small, and this lack of venture capital could put a limit on what we do here,” Kyser said. “Capital is what brings companies up to the next level.”

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The amount of venture capital going into a region signals whether that area will be a leader in the years ahead.

Some finance specialists argue that Southern California shouldn’t be compared with Northern California--the nation’s busiest region when it comes to venture capital with its concentration of high-technology companies. In fact, Southern California’s $206-million third-quarter figure compares favorably with that for entire states, such as Massachusetts, which got $215 million in the same period, and Texas, which received $192 million, Coopers said.

Nationwide, venture investment continued at a rapid clip in the third quarter, with capital totaling $3 billion, setting the stage for a record $12 billion for 1997, according to Coopers’ national “Money Tree” survey of 600 venture capitalists.

That would top the 1996 record of $10.1 billion and would be almost twice the $6.6 billion invested in 1995, Coopers found.

What’s fueling this explosive growth in venture capital? Nationwide, venture funds are flush with cash from investors who have made money in the stock market. In addition, more financial institutions such as pension funds and major corporate investors have jumped into the venture market, lured by annual returns that can hit 50% or more.

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In the third quarter, the amount of venture funds in Southern California was about the same as in the third quarter of last year, Coopers found. Meanwhile, venture capital investments increased 53% during that time in Northern California.

“While it doesn’t look great, we’re not falling behind,” said Massoud Entekhabi, a managing partner with Coopers & Lybrand. “But we’re not necessarily gaining much, either. This is a slow beginning.”

For the first nine months of this year, Southern California received $618 million in venture capital funds, compared with $667 million last year. Northern California received $2.4 billion in the first three quarters, compared with $1.7 billion by the end of September last year, Coopers found.

It’s not clear why so far this year Southern California is lagging even the amount of venture capital it received in 1996, said Entekhabi, who speculated that last year’s figures could have been affected by several very large deals. In recent years, however, Southern California has consistently lagged Northern California.

“Typically, for every five deals in Northern California, we get one deal,” Entekhabi said. “There’s an enormous mother lode [in Northern California] of successful companies. And there are more experienced management teams that don’t want to move down here.”

In Southern California, the industries receiving the most financings in the third quarter were biotechnology, consumer, health care and radio-television. In Los Angeles County, venture funds were divided primarily between health care and software, with no one area showing clear dominance, Coopers found.

Data that tracks local venture capital investments, though considered to be some of the best information available, can be inexact because they are calculated from surveys filled out by venture capital funds.

Many local entrepreneurs blame the dearth of venture investments on a lack of venture capitalists in the area. There are about 20 venture capital firms with headquarters in Southern California, compared with nearly 150 in Northern California. But venture capitalists argue that there’s a lot of money in the Los Angeles area. They say the problem is a lack of qualified entrepreneurs with strong business opportunities.

Recently, investors, academics and entrepreneurs have been trying to create a more significant venture capital community in Southern California. But those efforts have yet to result in measurable gains.

What’s needed is a local infrastructure composed of those with expertise in growing businesses, such as university outreach programs, and a strong network of wealthy individuals or groups with money to invest, some say.

“There’s no club yet--we’re trying to help create that,” said Paul Nadel, president of East-West Capital Associates in Westwood, an investor group of individuals from the entertainment industry led by Merv Adelson, founder of Lorimar Telepictures.

“The reason there’s no venture capital here is that there’s no notoriety in the venture community here. Where does a young start-up go?” he said.

So far, one of the largest investments by East-West has been a $5-million stake in Cinebase Software, a Los Angeles digital media management company. East-West closed four Southern California deals in August totaling $8.2 million, Nadel said.

Brad Jones, a principal at Brentwood Venture Capital, said he has seen increasing activity in Southern California. Brentwood recently invested $2 million in Trading Edge, an online, fixed-income trading company in Santa Monica, and $6 million in Sandpiper Networks in Westlake Village. Both deals will close in the fourth quarter.

Jim Gauer, a general partner at Enterprise Partners in Brentwood, a $435-million fund, said the Los Angeles area is at the stage Silicon Valley was at in the 1970s.

“The general dynamic here is that there are fewer venture funds,” Gauer said. “But I see things really beginning to pick up.”

Gauer’s firm recently invested $2.5 million in Mine Share, a Santa Monica software company.

Along with Costa Mesa-based venture capital partner InnoCal, a $75-million venture fund, Enterprise also invested $5 million in Thinque Systems, a North Hollywood financial services software company with 38 employees.

“This is our first big outside investment,” said President and co-founder Bridget Karlin. “We started with about $1,500 of our own money.”

The capital infusion will be used for corporate expansion, said Karlin, a former vice president at Union Bank who started the company about 10 years ago. Thinque eventually expanded, growing to almost $10 million in sales last year.

Southern California firms that received substantial venture capital stakes in the third quarter include:

* $28.5 million for ACME Television Holdings in Costa Mesa, a new venture that has contracts to acquire five television stations in St. Louis; Portland, Ore.; Knoxville, Tenn.; Salt Lake City; and Albuquerque. Jamie Kellner, CEO of the WB Television Network, is heading the group, which also includes Tom Allen, former chief financial officer for Fox Broadcasting.

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“This was our second round of financing,” said Allen, who said the group wants to buy and start stations in medium-sized markets where WB lacks a presence. “That, along with the $167 million in debt we raised in September, is allowing us to purchase five stations.”

* $20 million for Digirad, a San Diego medical device firm with 65 workers. This was the company’s fourth round of venture capital funding, said Karen Klause, president and CEO. “We’re positioning ourselves for the next level, which could be an acquisition or going public,” she said. Digirad just received Food and Drug Administration approval for its first product and has yet to post any annual revenue.

“Generally, in Southern California, there isn’t the intensity, the commitment or the clout that the ‘VC crowd’ on Sand Hill Road has” in Northern California’s Menlo Park, Klause said. “We have a lot of money here in San Diego, however. The [venture capital] firms we’ve worked with have been excellent.”

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Venturing Out

Southern California received about $618 million in venture investments in the first nine months of 1997, only one-quarter of the $2.4 billion invested in Northern California start-ups. Quarterly amount of venture capital investments, in millions:

Southern California*: $206.0

Northern California: $920.9

* Includes Los Angeles, Orange and San Diego counties

Source: Coopers & Lybrand

Firm Investments

In Los Angeles County, health-care companies received the largest amount of venture capital among all sectors in the third quarter. In San Diego and Orange counties, companies involved in biotechnology and medical technology topped the list. Investments in the third quarter, in millions:

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Industry Los Angeles Orange San Diego Biotech-medtech -- $29.5 $73.1 Communications 4.5 -- 22.7 Electronics -- 0.8 1.8 Health care 12.5 5.1 0.6 Radio-TV -- 28.5 -- Retail 5.0 -- 3.5 Software 10.9 -- 0.3 Other 1.8 4.1 1.3 Total 34.7 68 103.3

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Source: Coopers & Lybrand