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Southland Venture Investments Decline Again

Financing continues to slide as investors take a cautious tack. But the life-sciences industry is a relative bright spot.

January 28, 2003|Josh Friedman | Times Staff Writer

Venture capital investing in Southern California companies fell to a five-year low in the fourth quarter of 2002, reflecting a nationwide pullback that may drag on for much of this year, experts say.

Southland entrepreneurs received $344 million from venture capital firms in the period, a drop of more than 50% from a year earlier and the lowest quarterly total since July to September 1997, according to the MoneyTree survey by the National Venture Capital Assn., PricewaterhouseCoopers and Venture Economics.

Only 55 Southland firms were funded in the period, the lowest number in seven years.

Money was tight for entre- preneurs everywhere, as ven- ture funding nationwide fell to $21.2 billion in 2002, a decline of 49% from the year before. In Silicon Valley, venture funding fell to $7.1 billion last year, down 45% from 2001.

Venture financing has dried up in part because the three-year stock market slump has soured investors on initial public offerings. Taking companies public is a key way for venturists to cash out of firms. With the IPO market nearly shut down, venture investors are more reluctant to bet on risky businesses.

What's more, many once-high-flying technology concepts have bombed since 2000, leaving venture investors wary.

Venture capitalists typically invest in small companies, often at the start-up stage; the falloff in venture investing means money is tight for entrepreneurs who can't get bank financing.

Still, "We may finally be near the bottom," said Tracy Lefteroff, global managing partner of the venture practice at PricewaterhouseCoopers. If the stock market improves this year, especially the IPO market, venture investing could stabilize, he said.

"I'm optimistic that toward the end of the year we may see financing start to open up again," said Don Williams, head of Ernst & Young's Southern California venture capital advisory group, whose 2002 data found a similarly steep downturn in venture funding. But in the near term, "The reality is it's going to trend downward in 2003, at least for two or three quarters."

Along with geopolitical and economic worries weighing on public and private equity markets alike, Williams said, many venture capitalists are distracted by trying to "clean up" the problem companies already in their portfolios by merging them or selling off assets.

Some analysts see hope in the health care, or life sciences, sector, which comprises firms in biotechnology, medical devices and related fields. Investing in life sciences firms nationwide was down a modest 10% in 2002, survey data show.

In Southern California, medical device maker Alsius Corp. of Irvine received $29.1 million in the fourth quarter from venture investors; IDUN Pharmaceuticals Inc. and device maker Venetec International Inc., both of San Diego, won $22.8 million and $16 million, respectively.

Life sciences firms may attract relatively patient investors since the companies typically take longer to mature and pass regulatory hurdles, said Randy Churchill, business development director at PricewaterhouseCoopers. Alsius, for example, is on its 12th round of funding.

Among other Southland health-care companies, IPC Inc. in North Hollywood received $15.5 million in the fourth quarter. The company runs a network of "hospitalists," or physicians who provide in-patient treatment and manage the cases of people who are seriously ill.

IPC founder and Chief Executive Adam Singer said venture capitalists burned by the tech crash have warmed to profitable companies such as his, which won a third round of financing.

"The VC world got giddy in the Internet days when they thought of us as a boring business services company," Singer said. "Now, we're getting a better look. They're glad to see we're not some new Web site on how to sell cat food."

Not only are venture capitalists backing fewer companies, but they also are shelling out less money per investment as they strive for a "comfort level," according to the venture capital association. At the peak in the first quarter of 2000, the average investment was $13.2 million; in the fourth quarter of 2002, companies averaged $6 million.

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