Capital Markets Down but Far From Out for Investors.

THE picture is a dramatic one: $75.5 billion invested in 13,138 financing rounds in the United States by venture capital funds, the Nasdaq rising from just under 1000 to 4000, and arguably the best economic performance of our lifetimes - all of this between 1995 and the end of 1999.

The first quarter of 2000 continued the trend. More than $17.2 billion was invested by venture capital funds in 1,423 financings, and the Nasdaq hit 5000. But then, suddenly, the markets changed.

So, where are we now? The fundamentals are still strong, and there is plenty of money available to fund growth and new opportunities created by entrepreneurs looking to provide "pain relief' to "massive market pain."

Areas such as wireless communications and genomics are attracting investment dollars and top-notch management teams, as companies race to conquer new frontiers.

Here are some of the new realities of today's funding world.

What's different

* Entrepreneurs and venture capitalists are once again focusing on the basics -- cash flow, bum rates, profits, time to market, and the next round of financing. The IPO markets are no longer willing to act as a public venture capital fund for young, untested companies. "How much cash do we have?" and "How long will it last?" are once again significant agenda items at board meetings.

* Valuations for financings are significantly down from the astronomical levels reached in 1999 - entrepreneurs with an idea and an e-business plan will no longer command $50 million or more in valuation.

* Venture capitalists are have again looking at the need for financed companies to have more than 12 months of cash on hand at any given financing record point.

* Venture capital funds that are not managed by experienced private equity professionals who have weathered market changes in the past will need to be especially careful, or they will not post the financial performance necessary to raise their next fund.

The amount of money invested in U.S. companies by venture capital funds between 1995 and 1999 grew by over 470 percent to $35.6 billion; for the same period, such investments in L.A. grew by a staggering 1,960 percent to almost $2 billion.

The pace continued in the first quarter of 2000. We now have more venture capital funds residing in L.A. than at any time in the past 20 years. Experienced management teams can be created by tapping local companies. There is an abundance of networking opportunities for entrepreneurs and a reasonably active angel investor population -- neither of which existed five years ago. And organizations like Idealab! are fueling our growth.

So, what's ahead?

* The capital markets will come alive again after the summer recess. We will begin to see more IPOs and a strong finish for the year.

* Market sector consolidations and other mergers-and-acquisitions activity will continue to be brisk.

* Some of the dot-coins will not be here in January because they will run out of cash.

* Valuations will continue at their current levels - some say that they are still too high in certain sectors. Entrepreneurs who are too focused on getting high valuations will not get funded. The good entrepreneurs will instead focus on executing their strategy and thereby increasing valuation.

* Management teams are going to be more difficult to round out; seasoned executives with large organizations will be more hesitant to jump ship and go to a startup. While this will make things more difficult, it will result in mediocre managers (those fixated on the quick stock-option kill) staying put at their current jobs, but the driven managers will join young companies and lead them to success.

The L.A. area will be a beneficiary of these. We have a unique environment in which our entrepreneurs can thrive. We are a multicultural society, have excellent institutions of research and higher education, possess world class organizations that are the training ground for good management teams, have a convergence of entertainment and technology unparalleled by any other location in the world, and a multi-year track record of successful startups -- which act as a training ground for young entrepreneurs.

In summary, the year will end well, the capital markets will once again become a vehicle for financing growth rather than acting as public venture capital funds, valuations will stay at current reduced levels, and above all, great companies will always get financed. The future is bright for our city.

Massoud Entekhabi, long a consultant with Pricewaterhouse Coopers, is opening a West Coast office for venture capital firm TL Ventures next month in Santa Monica.