Out-of-town money is a point of frustration for some Orange County venture capitalists and angel investors.
Others say geography doesn’t matter.
A look at the number of deals and amounts invested in companies here favors the latter viewpoint.
A recent report by New York-based Pricewat-erhouseCoopers LLP and the National Venture Capital Association in October counts 18 companies here that received venture backing in the third quarter. That’s about 2% of the total nationwide, or roughly double Orange County’s share of the population.
Most of that funding came from sources outside OC, according to the report’s data.
“We’d all love to see a lot more capital based here in OC, and I think an outgrowth of that would probably be better-funded companies here,” said Bruce Hallett, founder and managing director of Miramar Venture Partners in Corona del Mar. “But there are just not a lot of capital sources in the county for early stage—or for venture at all.”
The landscape is long-established.
“Most of the money historically—maybe the last 10 years—has come from outside OC,” said Ken Salgado, a partner at the Irvine office of the Seattle-based public accounting firm Moss Adams LLP. “It’s the nature of the beast.”
No Surprise
It’s not surprising that Silicon Valley gets a lot of action in Orange County’s technology and healthcare sectors, said Jon Funk, managing director of Palo Alto-based venture capital firm Allegis Capital, which has put money into Irvine chipmaker ClariPhy Communications Inc.
“There’s a natural tendency to go where the money is,” Funk said. “The Valley has an established infrastructure and reputation to help companies.”
Orange County companies drew investments from 45 firms in the third quarter, with Silicon Valley accounting for 14 investments in OC. Four came from firms based here—each as part of joint investments with counterparts in other markets.
The rest of the funding in the third quarter came from around the nation and world.
Outside money flows here because it can, according to Miramar Venture’s Hallett.
“It’s not like OC venture firms are investing much elsewhere,” Hallett said. “We just don’t have a lot of OC-based venture firms.”
Miramar is one of the two local companies that invested here in the third quarter. It joined with a Silicon Valley firm to back Jeda Networks Inc., an Irvine-based startup that has yet to make details of its business plan public.
“It’s the first-round investment in a company that’s in the early stage,” Hallett said.
Laguna Beach-based Okapi Venture Capital LLC is another local investor that took a stake in an early stage OC company. Okapi joined with two firms in the Midwest—Ann Arbor-based Arboretum and Baird Ventures in Chicago—on a $10 million investment in Irvine-based PathCentral Inc., which offers community pathologists software and services for diagnostic testing.
The availability of outside capital has helped keep venture activity here relatively steady in recent years, according to data from Dow Jones VentureSource, a unit of New York-based News Corp.
Orange County has seen about 50 financing rounds each year since 2007. The amount of venture capital drawn by companies here fell to a recent low of $468 million in 2009, at the depths of the recession.
It climbed back to $815 million in 2010 and finished the third quarter at $524 million—a pace that lags last year’s but is still about 38% above the trough in 2009.
Some investors point to fault lines within the data, though.
The general uptrend in investment funding is “true in the macro sense,” said Christopher Ivey, co-chair of the corporate and securities practice group at Stradling Yocca Carlson & Rauth in Newport Beach. “But it’s still very difficult for early stage companies to find capital, particularly for the younger companies that aren’t mature enough yet for venture capital.”
The law firm is one of the backers of K5, a recently launched “pre-angel” organization in Irvine. K5 is offering early stage companies up to $25,000 of seed money and a three-month mentorship. The goal is to cull through prospects and connect the best of the bunch with potential investors.
K5 co-founder Ray Chan said he and others saw a need for a stronger support system for startups in OC.
The group aims to “build a more stringent system for the early stage, so that companies with ideas remain here, and also to attract investors to invest locally,” according to co-K5 founder Amir Banifatemi.
Miramar Venture’s Hallett agrees that early-stage companies have had difficulty as their later-stage counterparts have gotten the bulk of venture capital here lately.
“Larger funds are tending to put more money to work in later-stage opportunities since they’re closer to liquidity,” he said. “Firms that historically would take early-stage risks are less inclined to do so these days.”
Some angel investors see opportunity as venture capital firms focus on later-stage companies.
“Because of that, these good, better-than-average deals are having to come to sources other than venture capitalists—like angels,” said Stephen Flaim, executive vice president of Tech Coast Angels, an Irvine-based network of individual investors.
The organization invested $6.3 million to fund 31 companies last year.
Flaim defines “good” deals as companies that are “already in revenue” when they approach angels.
“We used to never see those,” he said. “We’re seeing more good deals than ever since our inception.”
Angels are filling a void left by venture capital firms that “look at $3 million to $10 million rounds,” said Paul DeRidder, an OC member of Tech Coast Angels’ executive committee. “The angel community is growing.”
Key Challenge
A key challenge for both venture capital firms and angels: raising new funds to keep the trend going.
“We’re seeing decreases in venture fundraising in the third quarter,” said Mark Sogomian, a partner at the Los Angeles office of New York-based Ernst & Young LLP, which tracks the Orange County market. “That, coupled with the exit markets that slowed down in the latter half of the third quarter, the question is, ‘how long can this increase in investing continue?’”
Randy Churchhill, director of emerging company services at the Los Angeles office of PricewaterhouseCoopers, takes a similar view.
“At some point the amount of money coming into venture won’t be able to support the increased activity,” he said. “When that happens, will the investors start investing closer to home?”
