O.C. Start-Ups Draw Record in Venture Capital

Reversing a two-quarter slump, Orange County start-up companies attracted a record investment sum in the second quarter, according to a report to be released today.

Investors poured more than $303 million into 26 local companies, more than double the amount invested a year ago, according the study by accounting firm PricewaterhouseCoopers.

The increase mirrors a surge in venture capital investments throughout Southern California and the nation, as investors pour billions of dollars into fledgling technology companies.

“You’re seeing more venture capital being raised than ever before, so I’m not surprised Orange County is doing well,” said Mark McManigal of the Edgewater Funds, a venture capital firm with offices in Newport Beach and Chicago.

The accounting firm includes Long Beach and Riverside County venture capital recipients in its Orange County study, but another recent survey also detected a similar trend for the area.

The National Venture Capital Assn. found that investors poured a record $368.4 million into 29 new businesses in the county, although the local growth rate--nearly 50%--trailed the torrid national and regional investment pace. Investments in fledgling firms throughout the nation nearly doubled in the quarter and increased fivefold in Los Angeles County, according to the NVCA.

The NVCA and PricewaterhouseCoopers use different methods for calculating the funding.

Orange County’s showing was bolstered by a handful of lucrative deals. FlashCom Inc., a Huntington Beach provider of digital subscriber lines for high-speed Internet access, led the way, raking in $84.15 million, while software developer IPNet Solutions in Newport Beach grabbed $40 million.

Eric Harrison, a partner with Crosspoint Venture Partners in Irvine, attributed Orange County’s showing to the growing number of Internet, software and communications companies.

He said the county should continue to fare well as entrepreneurs spawn new Internet infrastructure and other cutting-edge start-ups, alongside such mainstays as medical device and health care businesses.

Ken Benson of PricewaterhouseCoopers concurs. “Orange County is becoming an entrepreneurial hotbed, which is being driven by the shift to the Internet economy,” he said.

Orange County stumbled at the end of last year and the beginning of this year as venture capitalists cut back their high-risk spending in the region.

Analysts said investors bypassed the county for Internet and telecommunications start-ups that abound in the Los Angeles and San Diego areas. Also, interest in the county’s leading technology industries, including health care and medical devices, cooled at the time, said Harry Lambert, general partner at InnoCal, a venture firm in Costa Mesa.

The second-quarter investing spurt came despite months of market volatility.

Nationally, venture capital investments from April through June surged to a record $19.6 billion, more than double the amount invested in the second quarter last year, according to PricewaterhouseCoopers. Investors ponied up nearly $1.4 billion from April through June for 109 Southern California firms, about twice the money for the same period a year earlier.

The Los Angeles area, which includes Ventura and Santa Barbara counties, attracted about $728.7 million--more than double the funding received a year earlier.

San Diego County start-ups also received more funding but failed to keep pace with surging investments in the region and nation. Venture funding rose 67% to $331.8 million.

Venture capitalists plow money into start-ups and receive a major stake in the companies in return. The investors are betting on a big payoff when the upstarts go public or get snapped up at a considerable premium.