Venture capitalists sink $13 million into L.A. firms.

Calabasas computer concern targeted for meteoric rise

Calabasas-based Xylan Corp. was one of four companies in Los Angeles County to receive venture capital funding during the first quarter of 1994, according to a quarterly survey by Big Six accounting firm Coopers & Lybrand.

Xylan, which is developing a personal computer network system for major corporations, is also the only local company to have received first-round financing during the quarter. First-round financing refers to initial investments in start-up ventures.

Steve Kim, Xylan's co-founder and president, said his company plans to use the $3 million in first-round financing to develop high-speed computer networking systems to sell to Fortune 1,000 corporations, universities and publishing companies.

The company -- which, coincidentally, was launched exactly one year ago this week -- has yet to generate a single dollar in sales. However, Kim is projecting that Xylan will generate $100 million in annual sales within five years.

"When they (venture capitalists) make that kind of investment, they're really looking into the management of the company and to make sure they understand the market," said Kim. "This is a very fast-growing market. They thought that we could provide the technical leads."

Xylan is one of four Los Angeles County-based companies that together attracted $13.3 million in venture capital funding during the first quarter of 1994. That's about one-fifth the total venture capital invested in companies throughout the rest of Southern California during the first quarter, according to the survey by the Los Angeles office of Coopers & Lybrand. The bulk of venture capital continues to be invested in San Diego and Orange counties, which have higher concentrations of entrepreneurs in growth niches. In addition, those growth industries are supported heavily by local universities and businesses.

Coopers & Lybrand, which conducts the quarterly survey exclusively for the Business Journal, questioned more than 40 California venture capital firms about their investments between Jan. 1 and March 31.

During that period, venture capital firms pumped a total of $71 million into 18 entrepreneurial businesses in Southern California, signaling continued interest in Southland companies, said Jim Siegfried, a Coopers & Lybrand partner and head of its entrepreneurial advisory services practice. Eight of the 18 companies received financing for the first time.

The first-quarter investment was virtually identical to that of the fourth quarter of 1993, when California venture capital firms made 16 investments in Southern California companies for a total of $72 million. But in fourth quarter 1993, only three of the 16 investments represented first rounds of financing.

"First-round financing seems to be increasing, which should be encouraging to entrepreneurs," said Siegfried.

Venture capitalists said they don't expect the investment pace to slow down any time soon.

"The entrepreneurial community is in high heat," said Rich Shapero, a general partner in Los Altos, Calif.-based Crosspoint Venture Partners, one of the venture capital firms most actively investing in Southern California. "It was a real active quarter. It's a promising sign for the economy. It's what we like to see -- a wider scope of things to write checks for."

Follow-up financings (second, third and fourth rounds) are continuing, also a good sign, Siegfried said.

"That says companies are continuing to perform well, both in management and financial expectations," he explained.

Besides Xylan, the other L.A. County-based companies that received financing in the first quarter were:

* Paidos Healthcare in Santa Fe Springs received $7.8 million in follow-up financing. The company provides home health care to medically fragile children up to age 7.

* San Fernando-based Artmaster Studios -- which designs, manufactures and markets wall decor products and furniture accessories -- received $500,000 in its second round of financing.

* La Salsa Holding Co. -- the West Los Angeles-based fast-food Mexican restaurant chain -- received $2 million in its third round of financing.

Of the rest of the 18 companies that received financing in first quarter 1994, half were from San Diego County. Together, those companies received $39.7 million in venture capital funds.

A La Jolla-based company received $4 million and three Irvine companies raised $8.1 million in venture capital during the first quarter.

The Southern California companies attracting the largest amounts of venture capital during the first quarter were two San Diego pharmaceutical firms -- $15.5 million went to Prizm Pharmaceuticals and $11.4 million went to Houghten Pharmaceuticals. Both were second rounds of financing.

Venture capital firms, which invest money primarily on behalf of pension and retirement funds, have been interested in high technology and life sciences companies with growth potential, Siegfried said.

Firms such as Xylan have that potential, plus a proven management team, Siegfried said.

Xylan co-founders Steve Kim and Uri Pikover, who serve as president and director of sales, respectively, had succeeded in scraping up about $1 million from small, private investors when they were approached by Crosspoint and Los Angeles venture capitalist Brentwood Associates.

Kim and Pikover were already well known to the venture capital community. Kim had founded another start-up firm, Chatsworth-based Fibermux, a data communications company. Pikover was Fibermux's sales manager. Together, the men grew that company and sold it in 1991 for $53 million to a Minnesota telecommunications firm.

"We built a track record," said Kim. "With Fibermux, we made a return over 20 times to the venture capitalists. They made a lot of money from us." In layman's terms, "a return over 20 times" translates to a return on investment of more than 2,000 percent.

Venture capitalist Shapero said Kim's previous leadership was a big factor in Crosspoint's decision to invest in the company.

"Xylan surfaced out of the pack as a real investment with special promise," Shapero said. Besides its strong leadership, Xylan has many of the qualities that professional investors look for in small companies -- previous experience starting up a company, an appetite for success and a highly-qualified team of motivated employees, Shapero said.

"That's always a major issue in any young company," he said. "We always like to see people gambling and taking risks, sticking their neck out in new companies. What's encouraging to us is, this is increasingly a fact of life in Southern California."

Competition for venture capital money is fierce, though. Crosspoint, for example, examined 2,500 business plans in 1993, but funded only a fraction. Venture capital firms in Southern California see about 100 business plans a month, Siegfried said. Of those, only one or two a month receive funding, he added.

Meanwhile, the venture capital community expects the rest of 1994 to be just as active as the first quarter.

"The flow has been hot and heavy, and it appears to be maintaining through the summer," Shapero said. "Fall tends to be a pretty active time, too."