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Venture capital investment up in fourth quarter, down for all of '09

Much of the decline in California occurred in the Bay Area. Nationwide, venture funding of healthcare companies last year leap-frogged the longtime favorite, information technology.

January 23, 2010|By Robert Faturechi

The venture capital market in California slumped through a rough 2009 before showing signs of life in the last quarter, according to a report released Friday.

The weak period mirrored a down year nationally for such investments.

Venture capitalists doled out $10.4 billion for 1,033 California deals last year, compared with $15.6 billion for 1,246 deals in 2008. The one-third drop in value for California investing was slightly worse than the 31% drop nationally, to $21.4 billion for 2,489 deals.

The numbers are part of a quarterly report from Dow Jones VentureSource, which bases its data on surveys of professional venture capital firms. National figures were released Thursday night.

Though overall value slipped in the fourth quarter compared with the third, the final three months were better than the same period in 2008. Total investment in California companies increased to $2.8 billion for the quarter, up 6% from the year-earlier period. Nationwide, venture capital funding rose 3% to $6.3 billion.

Jessica Canning, global research director for VentureSource, said the decline in California for the year was expected. But she was surprised to find that most of the drop-off came in the Bay Area -- mainly the result of a slow recovery in the information technology industry.

"Overall Southern California has held up a little stronger," she said.

Securing capital can be crucial for entrepreneurs, particularly during hard times.

Jeff Solomon is founder of Leads360, a company that offers a Web-based application for managing sales leads. He hit a snag with clients after the mortgage crisis hit.

Anticipating a rough year, Solomon, who started out working from his living room at the end of the dot-com boom, sought $2 million of capital in 2009. He said the cash reserve gave him the peace of mind he needed to manage his business with a level head.

"It gave us some comfort," Solomon said. "When you're sitting in fear you can't make decisions. Sometimes making the wrong decision is even better than making no decision. Stuff falls apart like that."

Scott Sangster, president of Tech Coast Angels Los Angeles, a group of investors that funds local start-ups, said he expected investment volume and value to improve this year.

"There's nothing wrong with the creative spirit, the entrepreneurial spirit in Southern California," he said. "When we look back a year from now, 2010 numbers will be substantially bigger than 2009."

His group invested $5 million in 25 local companies last year, compared with $7 million for 31 deals in 2008.

The drop in venture capital hit the Los Angeles metropolitan area particularly hard. Investors handed out only $621.9 million in 2009, a 47% decrease from the year before.

Nationwide, venture funding of healthcare companies last year leap-frogged the longtime favorite, information technology. Venture capitalists infused the healthcare industry with $7.7 billion in 701 deals in 2009, compared with $6.1 billion invested in 817 information technology deals.

But in greater Los Angeles, IT captured more dollars -- $186.6 million -- than any other industry in the area.

Venture capitalists' focus on healthcare nationally came as an overhaul seemed on the verge of passage in Washington. The possibility that government would be shaking up the industry spelled opportunity for investors, Canning said.

"Venture capitalists are very good at anticipating market trends and going where the opportunity is," Canning said. Talk of streamlining hospital record-keeping, in particular, opened the window for potentially lucrative ventures. Canning said healthcare investment may have also enjoyed a boost because of the rising number of baby boomers reaching retirement age.

Though much of the year proved difficult for IT, the investment uptick in the sector during the fourth quarter served as a point of optimism for industry observers.

IT investment, Canning said, has traditionally been a bellwether for the health of venture capital as a whole. Canning called the end-of-the-year improvement "a very hopeful sign."

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