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Venture Funding Leaps in Quarter

New stakes in emerging U.S. firms hit $6 billion. The region draws 24% more than in 2005.

April 24, 2006|Annette Haddad | Times Staff Writer

Investors backing the nation's up-and-coming companies shelled out more than $6 billion in the first quarter, the most since 2001 and an 18% increase from the year before, data released today showed.

As usual, California entrepreneurs received a disproportionate share of venture investors' funds, with the Bay Area alone raking in $1.92 billion for a 5% increase. And more than a tenth of the total went to businesses in Southern California, where venture capital investment rose 24% to $658.6 million, according to a quarterly report by industry trackers Ernst & Young and VentureOne.

What's more, venture capitalists nearly doubled their investment in Los Angeles County's emerging companies to give local entrepreneurs their best quarter in five years.

Start-ups here collected $359 million, up from $196 million a year ago and more than double the amount of the previous quarter. Meanwhile, the number of deals surged 50% year over year to 27.

"It was a 'wow' quarter for Los Angeles," said Don Williams, head of Ernst & Young's Southern California venture advisory group.

San Diego had a "reasonable" quarter, Williams said. The biotechnology and life sciences hub took in 9% more in investments, or $246 million, as the number of deals rose 25% to 20.

But Orange County didn't fare as well. Entrepreneurs there received $53 million in venture investments, a 51% decline from the year before. Only five deals transpired in Orange County during the period, versus 11 a year ago.

Standing out among all U.S. start-ups was Los Angeles-based Amp'd Mobile, a youth-oriented wireless provider that was on the receiving end of the largest deal in the quarter. The company raked in $150 million in second-round financing.

Venture capitalists are considered vital to young companies in need of financing. These investors buy stakes and help manage growing businesses, hoping to cash in if the companies are eventually sold to larger firms or go public through initial stock offerings.

Lately, venture capital investors seem to be regaining their footing after getting tripped up by the dot-com collapse, Williams said. Venture financing in general is still down from its peak in 2000, when $95 billion rained on U.S. companies. But "there's growing confidence on the investors' part," said Williams, whose firm makes money advising on such transactions.

The number of U.S. deals rose 6% to 564, while Southern California transactions jumped 16% to 52, the report said.

The increase was influenced by a resurgence of investment in the information technology segment, which posted 327 deals and $3.36 billion invested. The tally represents nine more deals than a year ago and 13% more capital, the report said.

But the bulk of the funds for IT went to so-called later-stage deals, like Amp'd Mobile's. Only a third of the IT deals in the first quarter were so-called early-stage rounds, about the same proportion as a year ago.

"The renewed IT activity is a sign that investors are recognizing the significant potential of new information technology innovations and are supporting them once again," said Steve Harmston, director of global research at VentureOne.

"But investors also remain committed to existing portfolio companies, as the predominance of the capital investing shows," Harmston added.

Yet Los Angeles County seems to be bucking the national trend by collecting more early-stage financing. About 37% of local transactions involved so-called seed or first-round deals, compared with the national average of 30%, Williams said.

A big reason: The region is loaded with success stories that give investors confidence about funneling their money into firms that have ties to past winners. One of the biggest first-round transactions in the quarter involved MovieBeam, a spinoff from Walt Disney Co. that received $48.5 million.

The Burbank-based company, in which Intel Corp. and Cisco Systems Inc. have partnered with Disney and taken stakes, delivers movies into customers' homes via a set-top box.

Beyond information technology, the healthcare category saw 15% more deals in the first quarter than a year ago. The biopharmaceutical segment grew significantly, posting 16 more deals.

During the first quarter, seven venture-backed firms successfully completed their public offerings, helping to shift investment to other, still-private companies. Investment in health-care companies increased 22% over the first quarter of 2005.

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