Capital of Venture Capital

Venture capital is rolling into Southern California by the billions, spurring growth of small companies. These primarily high-tech firms do not depend on government contracts, as did the aerospace giants of the not-so-distant past, and are less vulnerable than aerospace to the whims of Washington politicians. Moreover, most of the companies that start with venture capital do well, growing fast, attracting more investment and creating high-paying jobs. Only about a quarter fail.

Venture Economics, a data firm that keeps track of venture capital investment, reports that such investment in Southern California--virtually nonexistent four years ago--reached $4.2 billion last year, double the amount of 1998. In addition, a PricewaterhouseCoopers report due out Friday shows a dramatic rise in venture capital investment in Los Angeles and Orange counties. Venture capital partnerships raise money from institutional investors to buy a stake in start-up firms.

What’s attracting money to Los Angeles is the creative talent of the movie industry and the technological advances of communication. “This is where Hollywood meets the Internet,” is how one observer put it. New media and Internet companies account for much of the investment.

In time the economic benefits of venture capital go well beyond the start-ups that are created. Of the 544 new U.S. companies that offered stock for sale last year, 271 started with venture capital. Their initial public offerings, or IPOs, generated hundreds of millions of additional dollars.

The start-ups also serve as a breeding ground for managers with the savvy to start their own companies and attract additional capital. Organizations such as the Southern California Technology Venture Forum help the budding capitalists with training and mentoring to prepare them for presentations to potential investors.

The new crop of small companies is changing the face of Southern California’s economy. A decade ago, the region’s high-tech industry was dominated by large companies serving one client, the federal government. Defense spending cuts in the early 1990s brought a peace dividend elsewhere, but in the Los Angeles area it translated into a loss of 142,000 jobs.

The emerging high-tech enterprises are building blocks of Los Angeles’ new economy, one that is more flexible and responsive than the defense industry was.