Venturing Close to Home in Southern California – Investors aim to foster more start-ups in the region

Despite the maple syrup, Jim Armstrong had a bitter taste in his mouth.

The fast-talking venture capitalist had backed a string of successful technology companies across Southern California. But by 2002, his projects were disintegrating, laying off workers and going bankrupt.

By:
Alex Pham
Los Angeles Times

http://www.nasvf.org/web/allpress.nsf/pages/9230

"I felt I didn’t understand this business at all," said Armstrong, 38, a partner at Clearstone Ventures in Santa Monica. "I needed to talk to someone who’s been in this business for a long time, who could be a mentor."

Over breakfast at Uncle Bill’s Pancake House in Manhattan Beach with Ted Alexander, a partner at Mission Ventures, Armstrong cooked up a plan: Gather the region’s top venture capitalists so they could swap stories and expertise. With the help of a dozen other firms, the Southern California Venture Capitalist Assn. was born.

Two years later, the group is working to raise the profile of homegrown venture capital, long overshadowed by the tightknit, well-organized and heavily funded investors along Silicon Valley’s famed Sand Hill Road.

Entrepreneurs in Southern California "don’t have to fly to San Jose to get money," Armstrong said. "There’s money local."

The association isn’t altruistic. Members figure that if they can attract the brightest entrepreneurs and make the region more hospitable for start-ups, they’ll attract more viable proposals and, in turn, make more money themselves.

There would seem to be ample opportunity. Southern California ranks third in the amount of venture capital its companies take in — after the Bay Area and Boston. But much of that funding comes from elsewhere.

Local entrepreneurs regularly catch Southwest Airlines’ "nerd bird" flights to Silicon Valley to plead for backing from the 258 venture capital firms based there. That’s about four times the number of firms in Los Angeles, Orange and San Diego counties, according to a recent count by Ernst & Young.

Southern California "is viewed as a bit of a backwater when it comes to venture capital," said Anthony B. Perkins, editor of a website for technology entrepreneurs and investors.

Among the first to try to change that image was EC2, an incubator founded in 1995 that was headed by University of Southern California professor and private investor Jon Goodman and sponsored by USC. But funding from the university dried up, and EC2 shuttered in 2002. Another group, Just Upwardly Mobile Professionals, or JUMP, cropped up in 1999 only to vanish in the technology bust.

Many remain, including the Los Angeles Venture Assn., Larta Institute, Orange Coast Venture Group and Tech Coast Angels. But aside from the Tech Coast Angels, the other organizations don’t invest; they provide advice, seminars or conferences that help entrepreneurs network.

"There are plenty of groups in Southern California," said Renee LaBran of Rustic Canyon Partners, who was skeptical of joining yet another organization promoting Southern California start-ups. Yet "while they all do good work, none of them have been able to connect with each other and form a critical mass."

Part of the problem is the area’s unwieldy geography, especially when compared with Silicon Valley’s cozy corridor along a short stretch of Highway 101.

In Silicon Valley, "you literally have dozens of venture capitalists on Sand Hill Road within a five-building complex" in Menlo Park, said Hoshi Printer, president of the Southern California Software Council, which hosts VentureNet, an annual event for software entrepreneurs and investors. "Here, it is so geographically dispersed that it’s difficult to create that same sense of community."

It’s an issue that Armstrong’s group tackles every 60 days, when members schlep to meetings from across the region.

"It’s not like a 10-minute drive to a wine tasting," joked Bob Conn, a partner at Enterprise Partners in La Jolla. "Here, we have to make a concerted effort."

At the June gathering, in a conference room of the San Diego Hyatt, 10 people attended, leaving their roll-on suitcases and laptop bags by the door, their Blackberrys charging in the corner and their cellphones on mute.

The participants took turns updating the group about their last three deals, sharing dollar amounts, trading names of entrepreneurs and exchanging candid notes on headhunters.

Sangam Pant of Evercore Ventures in Los Angeles mentioned a company in which he had invested, along with a prestigious Silicon Valley firm. (The Times was invited to sit in on the meeting provided that companies weren’t identified.)

"Where is it based?" Armstrong asked.

Sheepishly, Pant admitted that the company had recently moved to Redwood City, Calif., from Santa Monica. The others in the room booed.

The discussion moved on to the nature of entrepreneurship in Southern California. A guest speaker, Conexant Systems Inc. Chairman Dwight Decker, noted that, unlike in Silicon Valley, companies in this region don’t understand when their engineers run off to start companies.

"It’s not always encouraged," Decker said, noting that companies hate to lose talent.

Others pointed out that Silicon Valley pillars such as Cisco Systems Inc. and Intel Corp. were good at fostering spinoffs. These corporate giants often do business with former employees who have started companies and welcome them back to their old jobs if the start-ups don’t work.

"That kind of culture takes time to develop," said Bill Woodward, founding partner of Anthem Ventures in Santa Monica, who worked in Northern California as an entrepreneur in the 1980s and ’90s.

Silicon Valley venture firms have another edge: prestige.

"It’s referred to as ‘branded money,’ " said Theresia Ranzetta, general partner at Accel Partners in Palo Alto. Like a seal of approval, money from a well-heeled venture firm brings nods of approval from bankers, customers and other investors.

One successful Southern California company, financial software developer Digital Insight Corp. in Calabasas, turned to Menlo Ventures on Sand Hill Road for funding before its initial public offering in 1999. Its founders wanted investors who "could bring valuable contacts on Wall Street," company spokesman Erik Randerson said.

"Digital Insight recognized that well-connected venture capital firms could play a particularly helpful role during the IPO process," he added. "Menlo Ventures was brought in for precisely this reason."

The Southern California Venture Capitalist Assn. hopes to lure future promising start-ups by creating its own network, building up its reputation among entrepreneurs in the process. To some extent, it has succeeded.

The group has managed to help put together a few deals, including for Hawthorne-based Siderean Software Inc., a six-employee firm that makes search software. The company in May received $6 million from a consortium of two local venture capitalists and one in Silicon Valley.

Chief Executive Brad Allen, 45, said he looked specifically for venture backing from a local firm.

"I wanted people who would be familiar with me as a local entrepreneur because we want to be able to build the company down here," he said. "Otherwise, it’s difficult to get a lot of hands-on help, people who know the resources locally."

Still, Armstrong and his crew have no illusions. The venture business, they know, is only beginning to recover from the downturn of the last several years.

In the end, if just a handful of entrepreneurs remain in Southern California because of their efforts, they said, their mission is accomplished. "It’s just a step," LaBran said. "There are probably more things that need to be done. We have a lot of resources here in Southern California. We just have to work a little harder to pull it all together."