Venture capital came to Orange County in the second quarter.
About time.
VC money is as wide and deep, domestically and internationally, as it’s ever been, but somehow it avoided growth-stage companies here like a plague 2017—a grand total of $640 million—not even a round for Uber—down 40% from 2016 and barely 1% of all VC dollars invested in companies in major U.S. markets.
Deal flow was slow at 51. Only the VC-backed companies in Dallas-Fort Worth closed fewer.
2017 was cause for worry in the entrepreneurial economy here.
Rest easy.
“Second quarter of this year was the highest quarter on record for Orange County,” said Jeff Grabow, Ernst & Young’s venture capital leader.
What changed?
For one, “Markets ebb and flow, and that’s a good thing,” he said. “But Orange County is on pace to easily break 2000’s record of $1.3 billion.”
Later and Early
Aliso Viejo-based UST Global topped the recent 22 deals, a later-stage investment of $250 million from Temasek Holdings Ltd., sovereign wealth fund of Singapore. UST Global isn’t your father’s VC-backed company—the information services provider is 19 years old and profitable.
“(The funding) will help us leapfrog,” Chief Executive Officer Sijan Pillai told Singapore’s Economic Times.
In some ways, the developer of applications software for tasks ranging from customer service to data analytics to cybersecurity, is the kind of innovator that mirrors the much younger tech startups in San Francisco, Boston and New York. The techs the VCs crave.
“Technology’s broken outside of its vertical stack, Grabow said, “and it’s touching everything.” UST’s client portfolio runs the gamut: Singapore Airlines, e-commerce giants like China-based Alibaba Group, multinational banks such as the U.K.’s Standard Chartered Ltd.
The second- and third-largest Q2 investments also went to software firms—6-year-old cybersecurity-program developer Cylance luring a stage-five VC round of $120 million, from N.Y.-based Blackstone Group, and 2-year-old mortgage services app designer Cloudvirga attracting $50 million in second-round cash from Santa Monica-based Upfront Ventures. Cloudvirga and Cylance are based in Irvine.
Tops in healthcare was Aivita Biomedical Inc., $15 million to support development of its cancer drugs. Stem-cell pioneer Hans Kierstad runs the 2-year-old biomedical outfit. Of note here is investor SFCG Co. in Tokyo, just the latest Southeast Asian investor in OC healthcare companies. China’s Sanpower Group kicked off the trend, investing $820 million in Seal Beach biotech Dendreon, soon followed by Tokyo-based Konica Minolta’s $1 billion buy of genetic-testing pioneer Ambry Genetics.
IT companies, led by the top three, drew two-thirds of the Q2 investment, $447 million over seven deals. Healthcare companies secured the most deals, common in these parts, with nine.
There was no OC-based money flowing to the top 10 deals. But then, outside of Vinny Smith’s Toba Capital— approaching $1 billion in funds raised—large amounts of venture capital isn’t based here—yet. But there’s a minitrend there, too.
Time is Right
The VCs themselves may not be here, but the funds are surely elsewhere—and investor capital is flowing like a river to them. U.S. funds raised $17.7 billion in the second quarter, best in three years. And that’s just domestic capital. Consider that UST’s investment came from Singapore. And the big VC daddy, Tokyo-based SoftBank’s Vision Fund, closed last fall just shy of $100 billion, “and they’re raising another one, Ernst & Young’s Grabow said.
“Everyone quotes it at $100 billion, too.”
The money is drawn to these funds, which by definition make risky investments, because the stock and bond markets are frothy and flat, and investors are seeking higher yields. Grabow arrived in Silicon Valley in 1987, working with venture capitalists and venture-backed companies ever since. He said he’s never seen anything like this.
“We’re in record territory, great fund formation, lots of new entrants into capital markets, great fund deployment.”
And he thinks the managers of the funds will continue to look at lower-profile regions like Orange County.
“Can’t all go to Silicon Valley or to New York companies … can’t just go there and generate adequate returns, gives other markets opportunity … Silicon Beach, Orange County.”
He and others say a few big successes—profitable exits for venture investors via merger or public offering—will grease the momentum.
The VC fund managers and the folks who run corporate venture capital arms like Google Ventures and Intel Capital, have never had so many quality startups in which to invest.
“Never been cheaper to start a company,” Grabow said. “Entrepreneurship is very hot right now. Can’t time innovation. There’s artificial intelligence, there’s blockchain, there’s fintech and virtual reality. All makes the case for a lot of activity.”
Walter Cruttenden was a serial entrepreneur long before everyone was—started OC’s first investment bank, Crutteneden & Co., made an early foray into fintech with E*Offering in 1998, online investment bank that reduced initial public offering underwriting costs.
And Cruttenden got one of those successful exits for backers just 18 months in, selling E*Offering to Wit Capital for $328 million.
He’s still doing it. Cruttenden’s Newport Beach-based based financial services company Acorns LLC came in fourth on the Q2 list of VC-funded local companies with a $50 million anchor investment in a later-stage round from
$6 trillion investment giant BlackRock. Cruttenden and his 32 designers, engineers and researchers developed a microinvesting platform triggered when a user gets change from a transaction.
And Cruttenden did it again in July, merging the white-hot technologies of fintech and gaming, to trigger savings for gamers. Blast launched on Wednesday, after a topped-off initial seed round of $12 million. Better still for the ecosystem, Blast’s investors included a new shooter, RX3, an influencer-focused VC just sprouted in Newport Beach.
“The OC has sure come a long way in terms of VC funding,” Cruttenden said on the day Blast went live on Android systems, “and that reflects the robust economic activity here and housing prices.”
Home-Grown
More locally based seed capital would likely add to investment here—investors like to be close.
Jim Madden co-founded private-equity firm Carrick Capital Partners Ltd. The entrepreneur-turned investor founded software developer Exult in 1998 and took it public in 2000. Talking from his Newport Beach office in May, he shared his affinity for local companies.
“The quality of engineers and programmers keeps getting better here, and when I invest locally, I can meet the CEO periodically.”
Madden’s private equity portfolio had about 80 companies at that time, 25 based here, and some growth-stage ones like project-management software developer Mavenlink.
In the past year, the seed-stage Cove Fund has closed two raises, and Visionary Ventures in Aliso Viejo closed an initial $30 million ophthalmic fund and invested in about eight early-stage companies, a few based here.
Beware the Swan
Grabow and others are unabashedly bullish on OC-based companies drawing more venture capital and on the entrepreneurial; the system is producing investment-worthy companies.
“Barring any black swan event, we’ll see strong activity. Lots of capital, and the venture economy has become a big economy.”
Grabow said he’s concerned about all the companies and investors lined up at the exit. “Getting through the overhang, that’s the only problem I see. Also, where are you going to get all these things required to help these good new companies grow.”
Ah, scaling a young company in an expensive place like Orange County—but that’s not this story.
Finding good young companies here and getting them capital, that’s this story. And Grabow sees plenty here, like last Wednesday’s child, Blast, where Cruttenden and his team combined fintech with gaming to design a product with a laudable purpose for an exploding market.
“44% of Americans still have less than $400 in savings! Cruttenden recently wrote.
(Apps like Blast) built around games can be used for far more than entertainment … and quite possibly make a dent in the financial problems that plague many Americans today.”
Straight out of Newport.
— Pete Weitzner
