Good deals still find funds in new era of VC investing. (The Internet's Next Wave--Staking Out a Spot).

It's a relative world.

Compared to five years ago, venture capital funding has all but dried up.

Look back further, though, and the pace of investment seems not that out of the norm.

Pots of start-up money remain available -- it's just a matter of adjusting expectations.

"It's harder than it was to get funding, there's no question about that," said Brad Jones, managing partner of Redpoint Venture Capital in Los Angeles. "But for the good deals, it's not much harder."

Of course, some ideas are just not considered anymore, such as Internet retailers, search engines, Internet service providers, content delivery companies, Web hosting services, entertainment sites and Web portals.

"Some of those companies are doing well," said Jones of destination sites set up to appeal to a certain interest group, like medical sites. "But nobody is going to invest in another one."

For Jones, a good deal consists of a decent idea with proprietary technology and a management team in place. "It doesn't necessarily have to be a lot of dollars spent on development. What needs to happen, though, is the key technologies need to be thought up and developed," he said.

Despite some high-profile flops, online traffic has grown and Internet businesses continue to attract the attention of investors eager to invest.

"Our approach hasn't changed," said David Cremin, a partner at Zone Ventures. "Except maybe the speed in which we have to move to decide on a deal."

Among the areas getting funded, local VCs point to software applications for the Internet, wireless access to the Web, and communications and components.

Downloading music and movies is still a nascent business, and VCs like that.

Take, for instance, Blue Falcon Networks Inc., a Los Angeles company that sells software that makes it easier for content companies to deliver media online.

"Not knowing what the market is going to look like is perceived as an opportunity," said Jay Haynes, Blue Falcon's chief executive. "That's why it's called venture capital. If this were a slow-growth business we'd be funded by banks."

Portals and e-commerce sites are behind the curve, making unproven markets more appealing. "I think companies before might have gotten funded on technology alone," said Haynes. "Investors are asking, 'Why is this a potential growth business?"'

For companies still in growth mode, Haynes said venture capital is still the best funding choice. "For an early stage company like us, the best option is still venture capital," he said. "They understand risk."

The firm, founded in 1995, closed its second round of funding, $5.9 million, in October 2001. Blue Falcon's first round, of $5 million, came in May 1999. According to Haynes, the company is not yet profitable.

So what's changed?

Haynes conceded that in today's environment venture capitalists are requesting, and getting, more equity for their money, though he refused to say how much of a stake investors received in either of the company's rounds. "All I can say is that pricing is more reasonable from the VC's perspective -- valuations of both public and private companies have come way down."

Those companies unable to get another round of funding are finding that the acquisition route can be brutal.

"At the end of the road, when the VCs pull the plug, we usually get a phone call from somebody saying, 'We need to get sold,"' said Chris Karkenny, chief executive of NetCatalyst, a Santa Monica mergers and acquisitions firm specializing in technology transactions.

With prices high, some companies have decided to operate on a shoestring budget until they have something to bargain with. "Right now it's a buyer's market for VCs," said Peter Kim, chief executive of Qualte, an online customer service provider in Los Angeles. "They want to see revenues, revenue growth and clear path to profitability. We decided to hold off until we had that."

Rough Ride

Shares of L.A.'s publicly traded Internet firms have plummeted since
Nasdaq's March 2000 peak.

                         Price     Price     Pct.
Company                 03/24/00  04/17/02  Change

GenesisIntermedia Inc.    6.15      0.01    -99.92%

Netgateway Inc.          10.75      0.12    -98.88%

Northgate
 Innovations Inc.        40.94      0.68    -98.34%

United Leisure Corp.      9.13      0.25    -97.26%

L90 Inc.                 22.88      1.20    -94.75%

Homestore.com Inc.       47.81      2.53    -94.71%

US Dataworks Inc.         4.06      0.29    -92.86%

Infonet Services Corp.   27.25      2.17    -92.04%

United Online Inc.       95.00      9.58    -89.92%

AdStar Inc.               7.38      1.01    -86.31%

Youbet.com Inc.           4.50      0.78    -82.67%

Stamps.com Inc.          25.69      4.70    -81.70%

US Search.com             4.63      1.01    -78.16%

j2 Global
 Communications Inc.     21.50      7.05    -67.21%

Digital Insight Corp.    70.25     27.75    -60.50%

Overture Services Inc.   48.11     23.68    -50.78%

Ticketmaster             30.00     28.06     -6.47%

Source: Duff & Phelps LLC