Investors finding 101 Tech potential.

The products may not be headline grabbing, but venture capitalists say the 101 Tech Corridor nonetheless presents significant investment opportunities.

Speaking at a presentation on the state of venture funding in the region, a panel of investors said that the region that stretches roughly from Sherman Oaks to Santa Barbara houses a substantial cluster of emerging growth companies and good potential for spin-offs, both from existing companies and from the research underway at University of California Santa Barbara.

"If you look at the region you see these companies raising anything from $8 million to $75 million," said Jeff Carmody, chief operating officer at Agility Capital, a lender that specializes in venture backed and small cap public companies. "What that proves is there's opportunity for your early stage companies to spin out."

Carmody joined Stephen H. Watkins, general partner at venture firm Arcturas Capital, and Joseph Marks, managing member of Smart Technology Ventures, at "Shaking the Moneytree," a quarterly conference on venture investments sponsored by PricewaterhouseCoopers, Thomson Venture Economics and National Venture Capital Association, along with law firm Musick Peeler & Garrett, which recently opened offices in Westlake Village.

The panelists noted that spin-offs from research programs at UCSB, a slowdown among corporations seeking to invest in startups, quality of life issues in the Conejo Valley and the increased competition among VCs are drawing venture capitalists to the area.

While media- and entertainment-related technology companies are mostly clustered around the West Los Angeles area, the 101 Corridor is home to a number of other types of firms, the panelists noted.

"When you look at a broader region from Westlake Village to Sherman Oaks there certainly is a lot going on--networking, photonics--said Marks, whose VC firm focuses on wireless, photonics, broadband and other technologies. "If you are cognizant of the types of investments, (the area) makes sense, but not just everything."

Third highest

According to the Moneytree Survey, the Southern California region received some $2.2 billion of VC funding in 2004, the third highest area for investing behind Silicon Valley and New England.

Nationally, software companies attracted the most funding, $5.1 billion, up 18.5 percent over 2003.

But when taken together, biotech and medical devices won the lion's share of investment funds, $5.6 billion, the Moneytree Survey found.

"Life sciences is really the story," said Randy Churchill, director of business development at PriceWaterhouseCoopers, who presented the survey results at the conference.

Despite the presence of biotech giant Amgen in the region, the panelists noted that there has been a dearth of life sciences companies emerging along the 101 Corridor.

"Amgen made people so rich they didn't have to work," said Watkins, who worked at Amgen early in his career. "A lot of my friends decided to spend their time with their families and buy ranches in Montana."

Amgen employees profited enormously from stock options during the technology bubble, but that has changed, Watkins noted, and the company may generate far more startups in the future, not just because adjustments in the stock market have made options less profitable, but also because Amgen has grown to a size where it cannot devote resources to drugs that promise only modest returns. Those products, however, may be substantial enough to form the basis of startup firms.

While the passage of Prop 71, earmarking some $3 billion for stem cell research, is sure to boost biotech startup activity across the country, the panelists were nonetheless sharply critical of the legislation.

"I thought that was the worst piece of legislation that's come down the pike in a long time," said Watkins. "There's no more promise to stem cell research for curing disease than many other types of research. That being said, this region will benefit in some form."

Different criteria

In general, VC companies are out in force looking for investments, but their criteria is far different from the salad days of the technology boom in the late 1990s.

Among the trends, VC firms are eschewing interesting technologies and concepts for companies that are farther along in the development process. In many cases they want to invest in companies that already have revenues and customers.

Later stage and expansion stage investments made up the bulk of investments in 2004 on a national basis, the Moneytree Survey found.

Later stage companies, those already generating revenues through the sale of a product or service that is widely available, received $7.2 billion in venture funding last year, an increase of 47.5 percent over 2003. Investment in expansion stage companies was down in 2004 versus 2003, but those firms still received $9.5 billion in funding last year, the Moneytree Survey found.

By comparison, early stage companies received VC backing of $3.9 billion, 15 percent more financing than they did in 2003. And investment in seed and startup companies was down 10 percent to $346 million on a national basis.

"Something we've seen is VCs looking for mature companies to make an investment in," Churchill said.

Those companies that did not go down when the tech bubble burst have created managers better equipped to run companies today, the panelists said.

"What we're seeing are later stage companies that have weathered the storm," said Carmody. "These are experienced management teams that have weathered the storm."

At the same time, the move to invest in more mature companies has meant that earlier stage companies have to rely on their own resources. That, said the panel, has made them far better managers as well.

"The constraint in venture capital has created a class of companies that are scrappier, and more cognizant of risk on the downside than they were in the late 90s," said Watkins. "That's all very attractive to US."

National Funding Trends

       (in billions)

2000      $105.9
2001       $41.0
2002       $21.6
2003       $18.9
2004       $20.9

Source: PricewaterhouseCoopers, Thomson Venture Economics,
National Venture Capital Assn. MoneyTree Survey.

Note: Table made from bar graph.