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Growth in Venture Funding Bypasses Corridor

The money truck that has deposited large sums of venture capital in many parts of the country, has yet to arrive full speed along the 101 Tech Corridor. While venture capital investments nationally rose by 5 percent to 8 percent in 2004, after three miserly years, the companies along the corridor were treated far less generously. Some 20 companies in the area that stretches roughly along the Ventura (101) Freeway, from Burbank to Camarillo received a total of $95 million in funding in 2004. That compares with 18 companies funded in 2003 for a total of $150 million, according to data just compiled for the region by PricewaterhouseCoopers from the Money Tree Survey, a report by PricewaterhouseCoopers, Thomson Venture Economics and National Venture Capital Association. The local trend is in stark contrast to the national landscape, which saw venture funding spike to $20.9 billion in 2004, up from nearly $19 million in 2003, according to the Money Tree Survey. The average investment fell too along the Tech Corridor, to about $4.75 million in 2004, from $8.3 million in the prior year. By contrast, companies nationwide received an average of $11.1 million in funding in 2004, up from $9.2 million in 2003, the Money Tree Survey found. Taken as a whole, the Los Angeles area too surpassed the 101 Tech Corridor in funding last year, collecting a total of $706.3 million from 61 deals, compared to $595.6 million from 65 deals in 2003, according to the Quarterly Venture Capital Report released by Ernst & Young LLP and VentureOne. While the lower funding levels in the local area may be due to a larger proportion of first round investments, there are also indications that the area is missing out because some of the hottest sectors for investing are not well-represented along the corridor, and those companies that are located there generally lack the visibility and profile of companies in other technology-laden areas. “I think we could do a lot better if we did create a concentration or eco system of companies in the area,” said Randy Churchill, director of business development for the Southern California technology and entertainment practice at PricewaterhouseCoopers. After the dotgone bust, venture capitalists largely sat on the sidelines because the faltering stock market virtually eliminated opportunities for initial public offerings and mergers and acquisitions, providing few options for these investors to cash in on their investments. Beginning last year though, as the stock market improved, both the IPO and the M & A; markets sprang back to life, and along with it, VC funders got back in the game with plenty of money to spend. “The typical fund has a 10-year life cycle,” said Churchill. “The second five years is the harvest period. So most of the money raised in 2000 was invested and deployed and so now they’re in a new cycle. As an industry, they’re raised new amounts and they’re ready.” But if money is now more plentiful, it is not exactly easy. Looking elsewhere Many VCs have followed the M & A; and IPO markets, investing in life science companies which are also getting the lion’s share of acquisition offers, and so far at least, those companies are not well-represented along the corridor. “I think there has been some shift with many funds staying focused on the life sciences piece, especially when you look at the M & A; and IPO market,” said Don Williams, venture capital advisory group leader in Southern California for Ernst & Young. Williams noted that nationally, four out of the top 10 IPOs in 2004 were biopharmaceutical companies, and in Southern California, seven out of the top 10 were healthcare related. “That’s not to say there are not some other areas popping up,” Williams added. The other problem that Tech Corridor companies may be facing is a lack of visibility, particularly vis- & #341;-vis Silicon Valley and even places like San Diego where there are greater numbers of like companies clustered. “Silicon Valley is where the money is,” said Williams. “So what you will see is many of the entrepreneurs take their ideas to Silicon Valley. They realize if they can be in the Bay Area they’re closer to the money, and the general partners are more likely to make an investment in an area where they can drive 45 minutes to go visit rather than get on a plane.” Those companies along the corridor that did get funding in 2004 represented a range of industries from semiconductors to Internet advertising and marketing companies. Among them were Inphi Corp., a Westlake Village-based bandwidth solutions provider that received $18 million in a third round of funding; TechnoCom, an Encino-based wireless software and systems provider that received $6.75 million; Microfabrica Inc., a Burbank-based micromachine manufacturer that received $15 million, and Strix Systems Inc., in Calabasas, a developer of wireless communications equipment that also received $15 million. In general, the companies were at least five years old, and most had already gone through at least one if not more financing rounds before 2004. Wanting results Age and maturity are critical components in the funding decision because while venture capitalists are anxious to deploy the funds they have amassed, they are not willing to bet it on ideas that have yet to yield results. That is true even of early stage investors who, back in the 1990s, typically employed much looser criteria to their funding decisions. Last year, for instance, Tech Coast Angels, a group that provides capital as well as consulting and mentoring services to companies, saw its funding shift to later stage companies. “We funded the same amount of new rounds, which would be the very first level, but we’ve also funded a lot more follow on rounds,” said Gary Clark, chapter president of TCA’s newest chapter in Westlake Village/Santa Barbara, which just opened this month. At Tech Coast Angels, funding of later stage companies is up 41 percent, and even those early stage companies that are funded are likely to be much farther along than they were in the heyday of the dotcom boom. “Until there’s a product that’s bundled, shrink wrapped or we can see it’s on the cusp of that, then it’s too early,” said Clark. “In the past, what angel funding was looked at was that initial gap of idea to product. For most technology businesses today, they have to be beyond that.”

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