Venture Capital: L.A. Haunts It, but Who Doesn't?

IF venture capital investment were Major League Baseball, Silicon Valey would be the New York Yankees. But there's a lot of competition for the title of runner-up, which is one reason why interest over the data on venture money has never been higher.

A slew of reports released over the past week confirm that Southern California is attracting more venture capital than ever, thanks to the belief that a harmonic convergence of technology and content is taking place here that will fuel the Internet market for years to come.

But the money is also going other places: New England, New York, Seattle, Texas and Washington, D.C., among others. And the data highlighting the trends are garnering heightened attention in various regions.

Having data to show that an area is on the rise is cause for more than inflated egos: It can help attract more money to a city or state, not to mention fuel the hopes of entrepreneurs.

"It never used to be this way," said Tony Hung of DynaFund Ventures. "But it makes for interesting reading. Everyone knows that Silicon Valley is number one. But the numbers are good for the other regions because they can say, 'We're number two or number three,' or 'We're down and we need to do something about it,"'

Even local venture capitalists who say they don't really pay much attention to the figures become animated when discussing them, because the numbers showing all the activity in Los Angeles validate the bets they have made here.

"Don't you love it?" said Zone Ventures partner David Cremin. "You always see and hear about how hot Silicon Valley and New England is. We're neck and neck with New England."

L.A. cleans up

Indeed, that's the conclusion of the newest data from PriceWaterhouseCoopers. The amount of venture capital invested in the L.A. area (including Santa Barbara and Ventura) skyrocketed to $895.4 million in the last three months of 1999, up a staggering 785 percent from the like period of 1998, according to the accounting firm's study released last week. All of Southern California saw $1.4 billion in venture money in the fourth quarter of the year, a 535 percent rise on the year.

Southern California trailed only New England, with a quarterly take of $1.6 billion, and Northern California, with an otherworldly $5.7 billion, in attracting venture money.

Of course, these numbers come as no surprise to the venture capitalists themselves or to the companies they are investing in. But the data are an important marketing tool for any region that wants to demonstrate its vitality.

The numbers "are a major feature of selling Los Angeles. It gives us a very, very powerful story," said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. "It's more grist for our mill."

Kyser, who is charged with pointing out the benefits of doing business in L.A., will work the data' into speeches he gives to executives and comments he makes to the national press. Literature put out by his group to attract businesses, academics and students to Los Angeles will cite them to prove that L.A. is a hotbed of entrepreneurship and opportunity. Around the country, others use the numbers for much the same reason.

"Everyone's out there beating the drums," is how Kyser puts it.

After all, what better way to attract money than by demonstrating that others have success fully paved the way?

No more dry statistics

"Sure, I look at the numbers," said Arthur J. Marks, general partner at New Enterprise Associates in Reston, Va., and president of the Mid-Atlantic Venture Association. "They show that compared with before, we're not a backwater. Washington, D.C. and the area around it are growing very fast. The area's very wired. There are regions in the country where not much is going on."

According to PriceWaterhouseCoopers, the Washington, D.C. metro area, which includes Virginia, West Virginia and Maryland, attracted $640 million in the fourth quarter of last year, up 135 percent from the like period the year before.

No longer is regional economic health judged only by dry statistics like unemployment. Every area of the country that is experiencing the rush to invest in high-tech startups wants to emphasize the successes that have given 12-month-old companies billion-dollar valuations.

This spurs ever more investment - an important consideration since more and more regions are judged by their ability to attract talent and fresh ideas for the information age. The venture numbers are one indication of this.

"I can tell you that what we preach when discussing our area is that success should not be measured just by jobs, but by the number of startups, the number of dollars invested," said Angelos Angelou, a consultant in Austin, Texas, and former economic developer with the city's Chamber of Commerce. "These are the measurements of success in the New Economy."

Texas attracted $621 million in venture money for the last quarter of 1999, up almost 400 percent from the like period of 1998. Angelou calls Texas "Silicon Hills," just as other places have adopted Silicon Valley knock-off names to highlight their attractiveness to venture capital (including "Silicon Alley" in New York and "Silicon Forest" in Seattle and the Pacific Northwest). Southern California has avoided the word "Silicon" in its self-imposed moniker, hoping the terms "Digital Coast" or "Tech Coast" will catch on.

Differing numbers

Accumulating the numbers isn't easy, because some venture capitalists are unwilling to disclose how much they've invested where. And the numbers don't always agree. Along with PriceWaterhouseCoopers, San Francisco research firm VentureOne Inc., and Venture Economics, a division of Thomson Financial Securities Data, put out studies last week on venture activity. While the trends were largely the same, the numbers were different because they used different definitions of venture activity.

Venture Economics includes corporate venture money in its data, so its final 1999 number of $3.9 billion (which differs from the preliminary $4.2 billion that some media outlets reported) for Southern California is a bit higher than PriceWaterhouseCooper's 1999 number of $3.3 billion.

PriceWaterhouseCoopers was the last of the firms to release its data, but professed to be less concerned about speed than accuracy.

"Having different points of reference is healthy," said Massoud Entekhabi, who headed up the Southern California part of the firm's report. "But, having said that, we've got to figure out how to continually improve our polling practices, and how we tabulate and verify the data."

There were also differences in the way the differing organizations divided up the country. For example, PriceWaterhouseCoopers separates New England and New York, but Venture Economics puts them both together in the Northeast. Such discrepancies mean that the numbers can be skewed various ways to suit the advantage of those wanting to promote themselves.

"You can imagine what people do with these numbers," said George Clute, a partner in Olympic Venture Partners near Seattle. "Everyone seems to have an edge or ax to grind with them."

Yet in the next breath he gives a pitch for the booming activity in the Pacific Northwest, which reaped $622 million in venture capital in the fourth quarter of 1999.

"This has become without question one of the most heavily courted and hotly invested places in the world," Clute said. "I use to think Southern California would probably be the next great place for risk investment. But this place has absolutely taken off."

                    L.A. Venture Capital Deals in 1999
                 Handful of industries get lion's share...
Retail/Distribution 31.5%
  Business Services 21.4%
          New Media 15.1%
 Financial Services  7.5%
 Telecommunications  7.0%
           Software  4.9%
           Networks  4.0%
        Health Care  2.5%
        Electronics  1.9%
 Publishing/B'dcast  1.5%
      Biotechnology  1.0%
         Industrial  0.9%
     Semiconductors  0.8%
(percent of dollars invested)
                      ...And account for most deals.
  Business Services 29%
          New Media 27%
Retail/Distribution 26%
           Software 21%
        Health Care 12%
 Telecommunications  9%
 Financial Services  8%
         Industrial  6%
 Publishing/B'dcast  5%
           Networks  5%
        Electronics  4%
     Semiconductors  2%
      Biotechnology  1%
(Percent by number of investments)
                          4th-Quarter Investments
                Southern California moves into third place.
No. California $5,714
   New England $1,593
So. California $1,421
     Southeast $1,066
    N.Y. Metro   $977
    D.C. Metro   $640
       Midwest   $623
     Northwest   $622
         Texas   $621
      Colorado   $606
  Philly Metro   $318
 North Central   $209
     Southwest   $123
 South Central    $71
  Upstate N.Y.    $55
(millions of dollars)
Source: PriceWaterhouseCoopers LLP
                       Southern California Bonanza
  Amount of money and number of venture capital deals skyrocket in 1999.
     $ Millions invested # of deals
1993         191             41
1994         273             73
1995         525            127
1996         626            156
1997       1,064            208
1998       1,157            226
1999       3,309            361