Venture Funding Up From the Abyss
Venture capital investors shed some of their caution in the spring, producing the first significant rise in funding for private, entrepreneurial companies since the market bubble burst in 2000.
Funding was up nationwide in the second quarter, and for Southland firms the amount invested was more than double the first-quarter level, according to two surveys of venture investing released Monday.
A total of $4.3 billion was invested nationwide in the quarter ended June 30, up from $4 billion in the first quarter, a survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Assn. reported.
Another survey, sponsored by Ernst & Young and VentureOne, pegged total venture investment in the second quarter at $4 billion, up from $3.5 billion in the first quarter.
Though the surveys differ in the types of funding information they include, they showed the same trend: Venture investors became more willing to provide dollars -- and hope -- for young companies.
In an economy starved for new jobs, a turnaround in venture investing could give a boost to hiring, experts said.
Venture capitalists pool money from institutions such as pension funds and from wealthy individuals and buy stakes in promising young private companies. The goal is to score a huge profit down the road by selling the firm or taking it public.
Venture investing rocketed amid the technology boom of the late 1990s, then collapsed in 2001 as many private and public tech firms crashed. Scarred by their losses, venture investors hunkered down and shut off funding.
Now, “The hibernation is over,” said John M. Morris, a managing director at GKM Ventures, a Los Angeles-based fund.
He said many venture funds have had money to invest, but they’ve been busy trying to resuscitate companies already in their portfolios, or have been pulling the plug on firms that proved poor business ideas.
“My feeling is that the portfolio triage is complete,” Morris said. At his own firm, investors will get a look this week at two companies up for funding consideration, he said.
Other venture investors and industry analysts were less effusive about the second-quarter rise in funding. The fall of Saddam Hussein’s regime in Iraq, and the subsequent surge in the stock market, would have been expected to lift venture investing at least somewhat from the first quarter’s severely depressed levels, they said.
Though 669 companies got funding nationwide in the second quarter, up from 647 in the first quarter, the second-quarter total was down from 826 in the same period of 2002, according to the results compiled by PricewaterhouseCoopers and its survey partners.
Randy Churchill, an expert on venture funding at PricewaterhouseCoopers in L.A., said “cautious optimism” dominates in the business. Venture investors’ willingness to keep raising their funding levels may be tested if the economy slows again or if the stock market stumbles, Churchill and others said.
Even so, a particular bright spot in the second quarter was a surge in financing for early-stage companies, which often are the highest-risk firms.
Investment in early-stage companies nationwide totaled $956 million in the quarter, up 43% from $668 million in the first quarter, according to the PricewaterhouseCoopers report, known as the MoneyTree Survey.
Southern California also provided a positive note in the second quarter: The Ernst & Young/VentureOne survey found that Southland companies attracted $603 million in funding in the quarter, up from $262 million in the first quarter and close to the $617-million total in the second quarter of 2002. The survey’s Southland results include funding for firms from Santa Barbara to San Diego.
By contrast, funding for companies in the survey’s Pacific Northwest region, which is dominated by Silicon Valley, was unchanged in the second quarter compared with the first period, at $1.38 billion.
Southern California “looks pretty darn good” for venture investing compared with some other regions of the nation, said Don Williams, an Ernst & Young venture investing expert.
In the Los Angeles area, the leading industry in second-quarter venture funding was information technology, which attracted $85.6 million in the period, according to the Ernst & Young/VentureOne survey.
L.A.-area technology firms that got venture capital infusions in the quarter included Troika Networks Inc., a maker of computer networking hardware and software, and Fulcrum Microsystems Inc., a semiconductor company.
In Orange County, medical-device companies continue to be the top draw, with $53.8 million invested in that sector in the quarter. Funding beneficiaries included Orqis Medical Corp. of Lake Forest, which has developed a new way to treat congestive heart failure.
In the San Diego area biotechnology continues to be that region’s No. 1 sector for venture capitalists, attracting nearly $97 million in the quarter.
Yet the company at the top of the Southland’s second-quarter funding list in the MoneyTree survey wasn’t in the computer or health-care sectors: It was Oxnard-based Catalytic Solutions Inc., which has developed technology that improves the performance and reduces the cost of anti-pollution catalytic converters in cars.
The company received $32.4 million in capital from a group of venture funds.
Another big fund-raiser in the quarter was Santa Monica-based Tennis Channel Inc., a 24-hour, all-tennis cable TV channel that officially began airing in mid-May. It got $25.4 million from investors, according to the MoneyTree Survey.
Nationwide, the software industry attracted the most venture dollars in the second quarter -- $864 million for 179 companies in all, according to the MoneyTree Survey.
The biotechnology industry ranked second, with $639 million invested in 66 companies. Third was telecommunications, with 70 companies attracting $615 million.
Though many segments of the telecom industry still are suffering from overcapacity, venture investors are continuing to fund some of the telecom firms in their portfolios, hoping that the companies can fill niches of demand that develop as business spending on tech and telecom revives, analysts said.
Churchill estimated that venture capital funds nationwide have between $35 billion and $40 billion ready to invest -- capital put up by investors in recent years but not yet committed. But investors’ caution probably will hold quarterly venture investment to the $4-billion range for the foreseeable future, he said.
“That’s about what the market can handle,” Churchill said.
“The pot of capital is there,” said Jesse Reyes, vice president at Thomson Venture Economics. “Now there’s a bit more enthusiasm about putting some of that money to work.”
*
(BEGIN TEXT OF INFOBOX)
Southland venture beneficiaries
Here are some of the Southland companies that received venture capital financing in the second quarter:
*--* Funding in second Company Headquarters quarter, in millions Catalytic Solutions Oxnard $32.4 Tennis Channel Santa Monica $25.4 Orqis Medical Lake Forest $25.0 Troika Networks Westlake Village $15.2 NWP Services Santa Ana $15.0 Fulcrum Microsystems Agoura Hills $14.0 Opus Medical San Juan Capistrano $13.6 FutureTrade Technologies Lake Forest $12.5 Altrio Communications Los Angeles $5.0 Novocell Irvine $4.3
*--*
Sources: PricewaterhouseCoopers, Thomson Venture Economics, National Venture Capital Assn.
