Venture Capital Survey Finds Area Lacks Veteran Entrepreneurs

Although venture capital investments in Southern California firms rose dramatically last year, a new survey finds the region’s growing businesses still facing a so-called capital gap, in part because of a lack of veteran entrepreneurs and insufficient networking.

The survey of venture capitalists here found the region needs more experienced entrepreneurs who can deftly move from company to company, as they do in the Bay Area.

The survey respondents also said there is not enough networking here among firms, as well as among accountants, lawyers and financiers, a problem blamed in part on the geographic sprawl of Southern California.

“It’s extremely important that we create a community of people who can give critical help to these companies when they are starting out. Networks are coming together--they’ve just been slow in coming,” said Rohit Shukla, president and chief executive of the Los Angeles Regional Technology Alliance, a private, nonprofit organization funded in part by the state of California.

“This is our future. Venture capital can create high-impact companies, attract [knowledgeable] workers to our region and make it a better place to live,” he said.

The LARTA survey, released this month after local venture capitalists were surveyed late last year, also found:

* An estimated 25% of the region’s venture funds opened within the last three years. Twenty-seven venture firms are based here, compared with eight in 1994.

* An estimated 70% of the region’s venture investments in 1997 were made at the “seed,” or early-stage, level--a positive sign for very small or very new businesses. In part because of seed financing, the average investment by venture capitalists here was $2.5 million, versus a national average of $4.5 million.

* The region’s venture funds spent 33% more of their investment dollars in Southern California last year than four years ago, a good sign for the local economy.

* More than 75% of venture capitalists here said Southern California is lacking veteran entrepreneurs with successful track records.

* More venture firms are needed here, respondents said. In fact, 94% of the firms said they got most of their deals on referrals from other venture firms, many located throughout the nation.

* In general, venture capitalists rarely pick deals from the thousands of business plans sent to them each year. One said he received 4,000 “blind” business plans in 1998 and didn’t fund one of the projects.

* Most of the companies here that receive venture capital funding are in the biotech, information technology and medical industries, the survey found.

Although encouraged that the amount of venture capital investments in the Los Angeles area nearly doubled last year, the survey points to the lack of a closely knit venture community as a key impediment to getting more venture capital here.

The region needs more “prominent high-tech successes or foundation companies that throw off successful entrepreneurs to get involved with other new-company formations,” said Thomas Clancy of Enterprise Partners, one of the larger Southern California venture firms.

The news last week that GeoCities co-founder David Bohnett will join the board of Santa Monica-based Stamps.com is an example of what venture capitalists would like to see more of.

“As we get more VCs here and more anchor corporations, we are getting the infrastructure we need,” said Jeffrey Anderson, a principal of Mellon Ventures, which opened its office here two years ago but so far has invested mostly in companies based outside the region. “We hope to get more active in Los Angeles this year. There is a ton of potential here.”

Venture capital firms, which closely follow trends in the stock market when deciding which types of businesses to invest in, tend to be highly parochial, said Shukla, so a higher concentration of firms here would naturally mean big bucks for budding local businesses.

Some of the largest venture capital firms in Southern California include Crosspoint Venture Partners of Irvine, Brentwood Venture Capital of Los Angeles, Domain Associates of Laguna Niguel, East-West Capital Associates of Los Angeles, Enterprise Partners of Newport Beach, Kline Hawkes California of Los Angeles and Pittsburg-based Mellon Ventures’ Los Angeles office. Some of the newer, more successful local firms include Los Angeles-based Zone Ventures, Costa Mesa-based Innocal and Pasadena-based Idealab Capital Partners.

Venture capitalists take a chance on start-up companies by investing millions of dollars to get the firms off the ground. Usually wealthy individuals and institutions, venture capitalists often get their initial investment back, plus a hefty return, when that company goes public or is acquired or merged.

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Debora Vrana covers investment banking and the securities industry for The Times. She can be reached by e-mail at [email protected].