As venture capital town, L.A.'s a dud - here's why.

Los Angeles has a monster economy, which employs nearly 4 million people, and which harbors industries that are the envy of the world - from entertainment to aerospace to fashion.

L.A. is studded with world-class learning centers, including UCLA, USC, the California Institute of Technology and California Institute of the Arts.

But with all this, venture capital pours into local businesses at a rate rivaling such entrepreneurial hotbeds as, well, um, Philadelphia.

And the number of venture capitalists based in L.A. nearly rivals such financial strongholds as ... Minneapolis.

The blunt truth is this: As a venture capital town, Los Angeles is a dud, both as a source and as a recipient.

Of the 30 largest venture capital funds in the United States, only one, Brentwood Associates, is based in Los Angeles. It's ranked 29th.

And on a list of the 351 most active early-stage venture capital firms in the nation, the first Los Angeles firm to appear is No. 216, InterVen Partners, according to Wellesley, Mass.-based Galante's Venture Capital & Private Equity Directory.

Not only is there a lack of venture capitalists here, there isn't a whole lot of venture investing going on either.

Companies in Los Angeles routinely receive less venture capital than firms in San Diego County - despite the fact that L.A. County has roughly four times the population of San Diego.

A rare exception came in the first quarter of 1997, when L.A. edged out San Diego and Orange counties in terms of raising capital, according to Coopers & Lybrand LLP.

It was the first time in the 1990s that Los Angeles companies received more high-tech venture capital than San Diego companies.

Of $150 million raised in the first quarter by Southern California companies, $69 million went to Los Angeles-based enterprises, according to Coopers & Lybrand. San Diego and Orange counties received about $40 million each.

A year ago in the first quarter, Los Angeles garnered only $22.9 million of $155.1 million in venture capital going to Southern California companies.

Still, Los Angeles positively wilts when compared to the Silicon Valley, in terms of venture capital activity.

Roughly three-fourths of venture capital raised in California goes to companies in the northern half of the state, according to Coopers & Lybrand.

Why the local venture capital dearth?

Theories abound, from the lack of high-tech "mother companies" here, to the fact that L.A. financiers tend to be more of the leveraged buyout variety, to the belief that Los Angeles is less pleasant than Northern California, so talent has migrated there.

Some blame the media.

"Companies in L.A. are at a disadvantage because they are ignored by the local media, and thus the rest of the country doesn't get to know them either," said Rohit Shukla, the outspoken president of the Los Angeles Regional Technology Alliance.

"Everybody reads the L.A. Times, but they almost never have run a story on the overall technology movement that is here. They found the time to do one on Santa Barbara instead," said Shukla.

Los Angeles has not developed an image as a hotbed of entrepreneurship, so venture capitalists are not attracted here, despite the opportunities, said Shukla.

As for L.A.'s solid showing in the first quarter, "it appears that the media and entertainment [TABULAR DATA OMITTED] industries, which dominate the Los Angeles area, may finally be attracting venture capital," wrote Karen Gier, a Coopers & Lybrand expert on high-tech companies, in a recent report.

Gier said it is "too soon to tell" whether the first quarter will be a blip or a trend, but at least the money is going into multimedia, which many venture capitalists have been anticipating.

Nationwide, there appears to a nascent awareness that L.A. has the labor pool needed to provide content to the multimedia industry, be it video games, CD products or Internet-related services, said Larry Buchsbaum, manager of Coopers & Lybrand's national high-technology group.

"I am hearing more about multimedia in Los Angeles than before," he said. "Whether that will translate into financings, time will tell."

For now, the record remains dismal.

Even venture capitalists here, who are committed to Los Angeles, say they have not funded deals here.

"We are Southern California-oriented, and we have done eight transactions, but zero in Los Angeles," said Frank Kline, principal at the West Los Angeles-based Kline Hawkes California L.P. venture firm. "We've done financings in Orange County, Ventura, San Diego and a handful in the Bay Area."

The kind of growth companies that attract venture capital are not here in substantial numbers, and those that are often merge with other, larger companies, thereby eliminating the need for venture capital, said Kline.

Kline said the nature of Los Angeles' major industries - aerospace and Hollywood - do not lend themselves to venture capital, and he notes that local financiers tend to be of the leveraged buyout variety - not venture capitalists.

"What we have had here has been the TRWs, the Northtops, Arco, and that has fostered a different mental set," said Kline.

As for financiers, "we have had Drexel (Drexel Burnham Lambert Inc., the now-defunct junk bond brokerage),"

The "Drexel diaspora" of former employees has created a veritable industry of LBO funds and investment bankers, but not a critical mass of venture capitalists, said Kline and others.

Too, the quality of life in L.A. might not be as appealing, propelling potential venture capitalists to locate in the sylvan north, said Kline.

"New York and Boston are the financial centers, and I think when the venture shops look out here to set up, the wives see Los Angeles, and they say 'Yuck.' I know mine did. But they see San Francisco as a nice, cute New York," said Kline.

Kline's comments echo a new theory of economic development, which is that in a knowledge-based economy, growth companies locate where the employees are, and employees want to be in places with safe streets, good schools and less environmental degradation.

Others posit that the "mother companies" - high-tech companies such as Hewlett-Packard Co. or Fairchild Semiconductor Inc. from which employees jump ship to start other high-tech companies - are not as plentiful here as in Northern California.

With significant participation by Stanford and UC Berkeley, Northern California spawned several high-tech companies a generation ago, and today the mother companies have vast numbers of offspring, said Chris Lewis, principal in the downtown-based venture firm Riordan, Lewis & Haden.

"Employees in those mother companies got the entrepreneurial spirit, and started their own companies," said Lewis. "That really hasn't happened here."

Despite L.A.'s soft track record; many in the local financial community say better times are ahead.

Part of it might be a simple case of dollars and cents. Northern California is a very expensive place to do business. Some industry observers figure that L.A.'s lower house prices (relative to Northern California) will help secure a bigger role in the venture capital world.

"It may help; I've actually heard a couple smaller companies say the cost of building a business is less here. Engineering talent is less expensive down here," said Gier, though she added that "it is not going to be the key component of building the mass in Southern California."

The emerging multimedia industry, and Los Angeles' constellation of content providers - writers, actors, set-builders, graphics artists and others - also is bound to draw attention. "We have the ability to provide content," said Lewis.

But Gier noted that being the content-provider capital of the world may not be such an enviable position because content is not a proprietary technology.

"That's what venture capitalists are comfortable with - financing a proprietary technology that has huge worldwide markets. Content cannot be patented as easily," she said.

Ultimately, the long-term success of venture capitalism in Southern California depends on more companies and venture capitalists taking the plunge, and thereby building a network of successful management teams, and financial backers.

Once a critical mass is reached, as Northern California's experience suggests, venture capitalism will become a self-propelling force, generating more deals.