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Venture capital investment still sluggish in Southland

July 18, 2009|Alana Semuels

The venture capital market bounced back from a dreadful first quarter, but investments in Southern California were still sluggish in the second three months of this year, according to a report scheduled to be released today.

Nationwide, investors put $5.27 billion into start-ups in the second quarter, up 32% from the first quarter, according to Dow Jones VentureSource. Southern California attracted $433 million in venture investment in the quarter, down 59% from the same period last year. And in Los Angeles, venture capitalists invested $111 million, down 34% from the first quarter and 74% from the same period last year.

"Los Angeles had another challenging quarter," said Mike Schoenfeld, venture capital advisory group leader at Ernst & Young.

For the first time since Dow Jones started keeping track in 1992, investment in the healthcare sector outpaced investment in information technology. Venture capitalists put $2.23 billion into healthcare deals in the second quarter while investing $1.88 billion in information technology.

Even the renewable-energy sector, once thought by investors to be an area of sure growth, garnered only $221 million in the quarter, down 75% from the $897 million in the same quarter last year.

Many investors have their hands tied because they haven't been able to sell their existing companies or offer them on the public markets, said Samit Varma, a partner at Anthem Venture Partners in Santa Monica.

Those that are investing are doing smaller deals, Varma said. The median amount invested in the quarter, $5 million, is down 38.5% from the second quarter of last year, according to Dow Jones. That's the lowest median deal size since 1999.

"The bar for getting venture capital funding has been raised; we're forcing companies to do a lot more with a lot less," Varma said.

Investors are shunning young firms in favor of older ones closer to making money, said Valerie Foo, research manager at Dow Jones VentureSource. Later-stage financing accounted for 53% of all venture investment in the quarter, compared with 19% of funding for seed and first-round deals.

That doesn't mean early-stage entrepreneurs should give up, though, said Schoenfeld of Ernst & Young. Historically, very successful companies -- including Starbucks, PetSmart and Intuit -- have been founded in the dreariest days.


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