Venture capital funding for Southern California firms falls 42%

Southern California is a hotbed of young and innovative companies, but you wouldn’t know it by following the money.

Venture capital funding, the lifeblood of start-ups, has fallen sharply in the region this year, according to a report released Thursday.

Southern California companies raised $507.6 million from venture-capital investors in the first three months of the year, a 42% decline from the nearly $880 million in the first quarter of 2012. The data were compiled by Dow Jones VentureSource.

It’s the lowest total for any period since the $507 million registered in the second quarter of 2009, just as the stock market was bottoming out from the global financial crisis.

The numbers are a microcosm of the venture capital industry’s struggles nationwide, but many experts said they paint an overly downbeat picture of Southern California.

In the red-hot technology sector, for example, funding for Southland companies jumped 35% to $161.7 million, according to the report.

“I don’t think it’s as gloomy as [the report] suggests,” said Jeff Grabow head of West Coast venture capital for Ernst & Young.

Quarterly fluctuations are not significant when compared with the years it typically takes for a venture firm to raise funds from investors, plow the money into start-ups and have the companies grow into profitable entities, experts said.

Still, the data underscored the ongoing difficulties of the venture industry nationwide.

The industry has yet to fully recover from the excesses of the late-1990s dot-com bubble, in which investors poured in only to suffer generally disappointing returns in coming years.

The markets for initial public stock offerings and corporate mergers have been muted in recent years, preventing venture firms from cashing out investments and steering the proceeds into new companies.

VC funding fell across the nation in the first quarter.

Companies nationwide raised $6.4 billion in the first quarter, according to the report. That’s an 11.8% drop from the first quarter of 2012, and a 20.8% decline from the beginning of 2011.

The decrease may be due in part to venture firms raising less money from investors. Nationwide, firms have taken $4.2 billion into their funds this year. That’s down from $6.3 billion in the first quarter of last year, but up from the anemic $2.6 billion in the fourth quarter.

walter.hamilton@latimes.com