On a cool July evening, a spillover crowd of about 200 entrepreneurs gathered in Irvine with a common goal in mind: snaring enough investment dollars to turn their dreams into viable businesses.
Among them were engineers, operators of web sites and developers of medical devices. They nibbled on fruit and cheese and eagerly sopped up the collective wisdom imparted by Bay Area venture capitalists--do your homework, learn the idiosyncrasies of venture funds, get to know well-connected attorneys and accountants.
The reality is that if even one or two of them gets venture capital "it would be great," said Jack Mixner, a management consultant who helped organize the event.
In Southern California, where nearly two-thirds of new businesses in the state are formed, young companies are going hungry, and what they lack is the very stuff on which their survival depends: money.
"There's a generic, across-the-board lack of funding in Southern California," said Fred Rogers, president of Select University Technologies Inc., a Newport Beach firm that turns university-based concepts into businesses.
It's a little-seen but critical missing link in Southern California's economy, experts say.
Certainly, the business climate has vastly improved. Orange County has low unemployment and thriving medical technology and electronics industries. Los Angeles, ravaged by aerospace cutbacks, is reviving thanks to healthy entertainment and foreign trade sectors.
Nonetheless, many believe the dearth of capital is hampering growth in the technology hubs of Irvine, Burbank-Glendale, Santa Monica and along the Los Angeles-Ventura County border. Frequently compared with Silicon Valley, these areas have yet to achieve anything near to the unbridled prosperity of the behemoth to the north.
When it comes to nurturing new, cutting-edge industries, "we're just babies starting down the road," Rogers said.
Venture capital firms are the most visible example. They raise money and invest it in young businesses in hopes of making a killing a few years later when the companies are sold or go public.
In 1996, these firms invested $446.4 million in companies in Los Angeles and Orange counties, while $2.3 billion went to Silicon Valley, according to the accounting firm Price Waterhouse.
Southern California has only about a dozen resident venture capital firms. A decade ago there were more than twice as many, but the recession prompted some to close, while bank-run funds fell victim to industry mergers. Many that remain are investing more in Silicon Valley, saying that's where the action is.
In Northern California, there are about 150 venture funds, and the vast majority of their investments are close to home. Some have opened branch offices in Southern California in the past, only to close them because the number of deals didn't justify the overhead.
Indeed, in all of Southern California, only the biotechnology community in San Diego has been a consistently strong recipient of venture capital funds.
"You could go to the southern tip of San Jose, hop on a plane and fly down to San Diego, and there's not much going on in between," said Rolf Selvig, director of business development at the San Francisco research firm VentureOne.
To be sure, venture capital isn't the only way to finance a new business. Entrepreneurs still mortgage their houses, run up their credit cards and borrow from friends and family. But the death rate among such companies is high because they usually run out of cash before getting off the ground.
What's more, high-tech, cutting-edge firms often require big capital infusions that only a wealthy investor or venture capital fund can provide.
"We know which ones have made it," said James L. Watts, managing director of Pacific Summit Capital, a corporate finance boutique in Irvine. "But how many companies tried to raise money and had a good idea, and could have built it and thrived and grown and made a lot of jobs and paid a lot of taxes? We'll never know."
It's a complex problem, and solutions won't come easily, experts say. But the effect of Southern California's capital crunch, many contend, is that few market-leading companies have emerged to replace the shrunken aerospace infrastructure.
For every high-tech success story in Southern California, such as Western Digital Corp. and Kingston Technology Corp., venture capitalists say they can name at least 10 in Silicon Valley.
"Hewlett-Packard is a $20-billion company," said Bob Hoff, general partner at Crosspoint Venture Partners in Irvine. "That really brings stability to a region."
The disparity is even more glaring considering that Silicon Valley has scores of leading companies packed into an area that spans no more than 30 miles in each direction from San Jose. Los Angeles and Orange counties form a huge region with more people than Illinois (12 million), more workers than Michigan (5 million), and a gross product bigger than that of 47 states ($354 billion).
