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Venture funding rises in Southland

October 23, 2006|Josh Friedman | Times Staff Writer

Emerging companies in Southern California attracted increased venture capital in the third quarter despite a nationwide drop in funding, industry statistics show.

Southland firms received $710.6 million in venture money, compared with $681.3 million the previous quarter, according to the quarterly industry survey being released today by research and consulting firms Ernst & Young and Dow Jones VentureOne.

The increase was modest at 4.3%, but it came in contrast to the national trend. U.S. companies raised $6.36 billion in venture funding during the third quarter, a 6.3% drop from the second quarter, when $6.79 billion was raised.

Although venture funding declined nationwide, the overall trend looks encouraging, said Don Williams, partner with Ernst & Young's venture capital advisory group in Southern California.

For the first time since 2001, U.S. venture funding has topped $6 billion for three consecutive quarters, he said. In the Southland and nationwide, venture funding this year is on pace to exceed 2005 levels.

"The long-term trend is upward, but there is certainly no bubble," Williams said. "Activity is increasing at a level where entrepreneurs can sensibly manage growth."

In another positive sign, venture capitalists showed a willingness to gamble on young firms. Early financings accounted for about 40% of deal volume nationwide, versus the historical norm of 31%, Williams said.

The venture data provide a snapshot of emerging business activity in the region and overall.

Venture capitalists buy stakes in young companies, hoping to reap a windfall if the businesses are eventually acquired by a larger competitor or go public on the U.S. stock markets.

The majority of investments lose money, but those that succeed, such as Google Inc. or YouTube Inc., can be hugely profitable for their early backers.

In exchange for selling part of their firms, entrepreneurs get capital they can use for hiring, research, product marketing and other growth initiatives. They also get the advice of venture investors, who often take board seats or offer consulting services.

Venture funding has leveled off sharply in recent years after skyrocketing during the tech stock mania of the late 1990s and crashing in its aftermath.

Nationwide, venture funding reached $27.2 billion in the first quarter of 2000 as the Nasdaq Stock Market was soaring to record heights. Financing fell as low as $4.5 billion in the first quarter of 2003.

Alternative-energy companies are attracting increasing interest from venture capital investors, the survey shows. In 14 deals, U.S. companies in the sector raised $110 million in the third quarter -- more than double the amount from a year earlier.

In the Southland, venture funding increased last quarter in Los Angeles and San Diego counties. Money was harder to come by in Orange County.

In Los Angeles County, $252.8 million was invested, compared with $244.2 million in the second quarter. And in San Diego County, companies raised $312.2 million, compared with $249.8 million in the previous quarter. But in Orange County, fund-raising fell to $145.6 million from $187.3 million.

Although San Diego County, a hub for biopharmaceutical investing, attracted the most money, activity was busiest in the L.A. County area. Twenty-five companies in the L.A. region received funding in the third quarter, compared with 20 in San Diego County and 16 in Orange County.

Among the notable deals:

* Boingo Wireless Inc., the Santa Monica company that operates Wi-Fi networks for mobile Internet access, raised $65 million in later-stage financing.

* Two biopharmaceutical companies in the San Diego area received hefty investments. Zogenix Inc. got $60 million in its first round of venture financing, and NovaCardia Inc. got $48 million in second-round capital.

* Ripe Digital Entertainment, a Hollywood company that provides video-on-demand services through cable and broadband platforms, raised $32 million in first-round funding.

*

josh.friedman@latimes.com

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