Venture Capitalists Flock to Southland

Ask a venture capitalist where to find opportunity these days and you get a surprising answer: Southern California.

As recently as five years ago, you could count the number of venture capital firms operating in the Southland on the fingers of one hand. Now the area hosts more than a dozen, about half of them newcomers to Southern California in the last year alone. And it’s a good bet that more are on the way.

As you might imagine, the new firms target start-up and early-stage new-economy companies. In plain English, they don’t invest in the low-tech enterprises that form the backbone of the economy here, including small and mid-size manufacturers in industries ranging from auto parts to furniture to clothing. Such enterprises continue to struggle in rounding up outside capital and, if yours is one of them, don’t expect to solve the problem by banging on the doors of the venture capitalists looking for deals here.

Even so, the increasing availability of venture capital is good news for every business in Southern California on several counts:

* Start-ups and early-stage companies in such new-economy industries as information technology, Internet media content, data communications, broadband technology, telecommunications, business infrastructure software, and business-to-business and business-to-consumer e-commerce should find it easier to raise capital.

* Because success breeds success and because venture capitalists run in herds to mitigate the risks inherent in backing start-ups and early-stage companies, it follows that if the newcomer venture capitalists make money in Southern California, other investors may follow, perhaps finding opportunity in more traditional enterprises.

* Similarly, as new-economy ventures prosper here, so will those who supply them with low-tech services and products.

Who are these new venture capitalists active in Southern California, and what brings them here?

The newcomers include:

* Redpoint Ventures (https://www.redpoint.com), with offices in West Los Angeles and Menlo Park.

* Palladium Venture Capital (https://www.palladiumvc.com), with offices in West Los Angeles, Irvine and Menlo Park.

* Palomar Ventures (https://www.palomarventures.com), with offices in Santa Monica and Irvine.

* ECompanies Venture Group (https://www.ecompanies.com), headquartered in Santa Monica.

Of these, Redpoint is by far the largest, with $720 million to invest. Formed in October, the firm is an offshoot of a Northern California fund, Institutional Venture Partners, and Brentwood Venture Capital, a long-established Los Angeles firm. Its capital comes from institutional investors and wealthy individuals, half of it targeting start-ups and early-stage ventures in Southern California.

Redpoint has already committed more than $55 million to six ventures in Southern California. So far, its investments here and elsewhere exceed $200 million in all, directed at Internet-related companies developing hardware and software for business-to-business and business-to-consumer enterprises and at Internet media companies.

Palladium Venture Capital, formed last fall with $250 million, focuses on early-stage health-care ventures, specifically on companies developing medical devices and biotechnology or providing health-care and e-health services. The firm’s founders include alumni from Brentwood Venture Capital, Crosspoint Venture Partners and Institutional Venture Partners.

So far, the firm has invested in four companies, three of them in Southern California. It expects to make half of its investments here.

Palomar Ventures, founded last April, is an $80-million fund targeting early-stage companies in the data communications, telecommunications and broadband communications industries, along with firms developing e-business infrastructure software or engaging in business-to-business and business-to-consumer e-commerce.

Most of that $80 million is already invested in nine companies, five of them headquartered in Southern California. Jim Gauer and Randall Lund, the firm’s general partners, are raising capital for another fund totaling $150 million or more.

ECompanies Venture Group is an outgrowth of an incubator similarly named and formed in May by Sky Dayton, who founded Internet service provider EarthLink, and Jake Winebaum, a Walt Disney alumnus.

ECompanies Venture is a $130-million fund formed mainly to back Internet-related businesses coming out of the ECompanies incubator--22 so far, including half a dozen in Southern California. Dayton and Winebaum are forming a second, $300-million fund.

As to the question what brings these venture funds to Southern California, the answer is simple: opportunity. The defense and aerospace industries no longer command the talents of the best and brightest technical graduates of UCLA, USC, Caltech, UC San Diego and the other top schools here, and that makes for a big pool of young people eager to test their ideas in the high-tech world.

That, in turn, lures backers eager to capitalize on the expertise they find here, particularly venture capital firms offering not just cash but hand-holding as well.

“A few years ago, I think you’d have seen maybe 10 or 15 quality opportunities in the Greater Los Angeles area,” says Jim Gauer of Palomar Ventures. “This year, there may be more like 150 or 200 bankable ideas that will be worthy of top-tier venture investment.

“That’s a big jump, and part of it has to do with the ‘dot-com’ revolution and part with the entertainment industry, which has created a rich gene pool of talent here.”

Next Week: More on the mushrooming number of venture capital firms in Southern California.

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Juan Hovey can be reached at (805) 492-7909 or jhovey@gte.net.