Lack of Core Industry in L.A. May Be Area's Blessing.

CRITICS say L.A. has trouble competing with other venture capital destinations because the region is too spread out and lacks critical mass in any specific technology.

But those liabilities could be a plus if the current shakeout gets nastier. Given the region's economic diversity and wide variety of investments, L.A.'s nascent venture capital community is in good shape to weather the coming storm, according to several industry observers.

"It's going to be slow, rough sledding for everyone," said Rohit Shukla, executive director of the Los Angeles Regional Technology Alliance. "Still, L.A. will continue to hold its own in respect to other areas."

And while some wonder if venture investments will dry up locally as a result of the dot-com implosion, area venture capitalists don't believe Southern California was hurt more than anywhere else.

"The issue with failed dot-coms and content-related companies aren't just limited to Southern California. Every major region has experienced those," said Todd Springer, a managing director with Trident Capital.

Over the long haul, L.A. has a good opportunity to build critical mass as a venture investment mecca thanks to a decent quality of life, more affordable real estate -- especially when compared to the Bay Area -- and heavyweight universities such as Caltech, UCLA and USC, several venture capitalists agreed.

"Over the last three years it has become extremely expensive to do business in the (Silicon) Valley," said Ravin Agrawal, a partner with East West Venture Group in Los Angeles. "At the end of the day, L.A. does have tremendous livability."

The venture capital industry has experienced explosive growth over the last several years, with the amount of investments skyrocketing nationwide from $5 billion in 1994 to $68.8 billion in 2000, according to an analysis by LARTA.

While venture capital investment grew almost 13-fold nationally, greater Los Angeles experienced a 30-fold jump during the same period, as entrepreneurs left Old Economy companies to launch their own startups.

Explosive growth

A comparison of the nation's top venture capital destinations found that the greater Los Angeles metropolitan region -- defined as Los Angeles, Orange, Riverside, San Bernardino and Ventura counties -- has managed to more than keep pace with other VC hot spots, in terms of percentage growth.

Between 1997 and 2000, the number of venture capital investments in L.A. grew 181 percent compared to a 117 percent increase for the San Francisco Bay Area and a 99 percent increase for Massachusetts. L.A.'s growth rate was surpassed only by Austin (203 percent) and New York (271 percent), according to LARTA.

In terms of dollars invested, the L.A. region's growth was even more dramatic. It saw a 489 percent increase in the amount of venture capital invested during the same period. However, other areas grew even faster in that regard, with Austin and New York topping the list, with 785 percent and 759 percent increases, respectively, in venture capital investments.

But with the economy faltering, can L.A. maintain its claim as a significant VC destination?

Thomas Clancy, managing director of San Diego-based Enterprise Partners, said he doesn't believe this region will be hurt disproportionately.

Most venture capital groups in the region have fairly diversified portfolios, he said. Also Southern California has a diverse economy, which should help minimize the damage, he added.

Springer, with Trident Capital, agreed that venture spending will slow, but over the long haul he expects Southern California to keep pace with other regional markets, in part because of the local talent base.

"Venture money tends to follow where the best managers are, the best entrepreneurs and the best ideas," he said.

Caltech, USC and UCLA should also help fuel growth in startups and a subsequent surge in venture activity.

"All three universities are starting to become more aware of the commercialization of technology and working with private investors," Springer said. "I think it's only a matter of time before we start seeing some exciting technologies come out of those universities."

Area retrenching

Agrawal, with East West Venture Group, sees L.A.'s growth as a venture capital destination over the last couple of years as an anomaly that was fueled by the speculative dot-com bubble. Now that the bubble has burst, it's going to take several years for the area to gain critical mass as a venture capital destination, said Agrawal, but he sees the day coming.

"It's going to happen in L.A., but it takes time," he said. "It's unfair to compare this area to the Silicon Valley, which started with HIP (Hewlett Packard) and has been 60 years in the making."

Brad Jones, a partner with Redpoint Ventures, agreed that L.A. should continue to hold its own relative to other venture destinations.

He believes the recent speculative boom was good for the region because it helped create the infrastructure needed to encourage more venture investment.

Meanwhile, several important pockets of technology have sprung up in places like Irvine, Culver City, Long Beach and the Tech Corridor along the Ventura (101) Freeway, and he expects those pockets to continue to grow.

"There are a lot more networking opportunities than there ever used to be," he said. "That's bringing tech players together from different pockets from around the city."

The economic climate is a concern, said Jones, but it's a concern for everyone. "We're seeing fewer deals now than a year ago, and doing fewer yet," he said. "The activity level has certainly declined, but I do believe it's no worse here than anywhere else."

Eve Kurtin, managing director of Pacific Venture Group, an Encino firm that specializes in health care companies, pointed out that L.A. remains a relatively small player in the venture capital world.

"You can walk into office buildings in the Silicon Valley and find as many venture capital firms as you do in all of L.A.," she said.

She doesn't see that changing anytime soon. "L.A. as a city and county doesn't have a supportive tax structure for startups," she said.

What the area does have, however, is the entertainment industry.

Many venture capitalists were burned badly by investments in entertainment-related startups, but Shukla said that experience taught them an important lesson: Let the studios and AOLs of the world take cam of the content.

That still leaves tremendous opportunities for startups to provide the technical tools -- everything from encryption to transmission technology -- needed to distribute movies and other content over the Internet.

And despite the economic downturn, L.A. is gaining expertise in other important technologies, most notably telecommunications. "This (downturn) has not stopped the onward march of broadband demand," Shukla concluded.