Venture Capitalists Proceed Cautiously in Third Quarter.

THERE was a time when venture capitalists investing in Los Angeles companies were enamoured with content-based Web startups that were going to revolutionize the Internet and the business world.

But all that changed in the third quarter of 2000. Now VCs are more focused on technology companies that are inventing ways to make the Internet a faster place to do business. Or they are interested in backing, for instance, firms that are developing ways to download a movie quickly over the Internet or to get a traffic report through a wireless Palm Pilot.

But above all, venture capitalists are lovingly tending to investments they've already made, deciding which to fund further and which to let die.

While the amount of venture capital invested in L.A.-area companies during the third quarter was down slightly from the amount invested in the second quarter, it was still double the amount invested in the third quarter of 1999.

According to PricewaterhouseCoopers, venture capital financing going to Los Angeles-area companies during the third quarter totaled $677.1 million, compared with $331 million during the year-earlier quarter.

In the second quarter, venture capitalists invested $728.7 million in L.A.-area companies.

Some of the major recipients of third-quarter venture capital were: eConnections Inc., a business-to-business global supply chain management site for the electronics industry that received $75 million; Business.com, the Santa Monica-based business portal that received $61 million in third-round financing from the Financial Times, Cahners Publications, Mort Zuckerman and others; Need2Buy.com, which got $43 million in second-round financing; and Vizional Technologies, formerly known as Go Warehouse.com, which was awarded $35.5 million in second-round financing.

"The year-on-year growth looks very strong," said Richard Withey, a PricewaterhouseCoopers partner in charge of the global technology group in Los Angeles. "It looks like the L.A. region will exceed $3 billion (in venture capital investment) for the year for the first time."

Shift in preferences

Withey noted that investors now are rarely interested in business-to-consumer sites, unless they have an outstanding idea. One exception has been E-Style, the Santa Monica-based Web site that sells baby and maternity apparel. It received $25 million in fourth-round financing from investors such as Goldman, Sachs & Co.; Oak Investment Partners; Primedia Ventures; Vulcan Ventures and Zone Ventures.

"The money seems to be shifting to infrastructure and telecommunications companies. The B2B sites could be included in this infrastructure category," he noted.

Another trend of the third quarter was that venture capitalists tended to concentrate on second- and third-round financings for companies they have already funded, rather than on earlier-stage fundings.

"The IPO market has dried up and they have to continue to fund these companies because they can't take them public," Withey explained.

One venture firm fitting that description is Allegis Capital, which did not make a single investments in the third quarter, according to Managing Director Jon Funk. Instead, it has been analyzing its current portfolio and making hard decisions.

"You could safely characterize our industry in the third quarter as going from being extremely focused on doing new investments to turning inward on current portfolios," Funk said. "There is a ton of work being done to decide who is going to survive and who is not."

At Zone Ventures, Managing Director Frank Creer noted that the company is still investing in new deals. But it is also making a number of bridge loans to some of the companies it has previously funded.

Different approaches

"There are two schools of thoughts," Creer said. "You have one group of venture capitalists who are very, very cautious. They have X million dollars left in the bank and they have invested in a bunch of dot-coms that are having a hard, time. They are thinking, 'Let's not do any new investments and keep our companies alive.'

"Or they think, 'I have a lot of great companies, but I can't stop moving (to invest in additional startups) because there are so many new companies to invest in We're kind of in between. Right now, I am doing one to two deals a month instead of two or three deals. I'm holding back a little to help my companies, but we are still investing in new companies.

Creer said Zone Ventures is excited about investing in a number of new technology companies that use the Internet to make communication easier between companies or deliver an innovative technology that can be used by Internet denizens.

For example, Zone Ventures in the third quarter invested in SIWAVE Inc., a Glendale-based company that designs, manufactures and markets high-performance component optical switches to enable high-speed routing, processing and computing. The company was started by Jet Propulsion Laboratory scientists in Pasadena.

Zone Ventures also invested in a San Diego firm that is working on a video-compression technology aimed at enabling consumers to download an online movie in 30 minutes instead of the current 90 minutes.

Tom Unterman, managing director of Rustic Canyon Group, formerly known as TMCT Ventures, said his group's investments am technology-driven, too. It recently invested in-an Orange County fiber-optics components company. During the third-quarter, it contributed $5 million to the $43 -million invested in Need2Buy.com, the online marketplace for buyers and sellers of electronics components.

But Rustic Canyon is also studying its current portfolio and looking at how to keep some of those companies alive.

"We are committing a little more of our capital than we had originally planned to our current portfolio because the markets are more restrictive," Unterman said. "We are spending more time on our current companies and less time on new initiatives."