FOR Robert More, deal flow is up, precipitation is down.
Mr. More, a partner with Domain Associates, moved last year from the company’s Princeton, N.J., headquarters to Southern California, where the life-sciences-centric venture capitalist firm has a growing second office.
The development is part of a significant boom in the investment of seed money in a region known less for seed capital than for the entertainment and defense industries, surfing and sun-tinted skin.
In 2005, venture capitalists invested $2.54 billion in 301 deals in the San Diego area and in Los Angeles, Ventura, Riverside and Orange Counties, a 17 percent increase in dollars over 2004. By contrast, the industry invested $2.67 billion in New England, a 13 percent decline in funds.
The change marks an ascendancy for the Southern California region, now challenging the Boston corridor as No. 2 behind Silicon Valley in allure to venture capitalists.
”There is a distinct possibility that Southern California will eclipse New England in the very near future,” said Mark G. Heesen, the president of the National Venture Capital Association. ”It is a significant shift.”
The growth of high-risk, early-stage capital in the region does not appear to be attributable to any single reason, but to a handful of factors, including the proximity of Silicon Valley and the Pacific Rim, the strength of universities, a critical mass of companies in a handful of industries and, of course, lifestyle.
”I haven’t seen snow yet,” Mr. More said. ”San Diego is like ‘Groundhog Day’ — similar weather every day, in a good way.”
But what has started to snowball are the business successes, Mr. More said, noting that as big corporations and entrepreneurs thrive in the region, they beget more start-ups and the cycle develops momentum.
Until about 18 months ago, Domain Associates had one full-time partner in an office in Irvine. Now it has two full-time partners, including Mr. More, and a principal and an associate in bigger offices that the company moved into in San Diego in February.
”All the pieces are here to make it successful,” Mr. More said of the region. ”And relative to other areas, like Boston and Silicon Valley, there are less of my brethren here, and, quite frankly, that’s an attractive feature as well” because there is less competition.
The obvious inference is that the start-ups attracting money in the region are spun off from media and defense industries, and, to be sure, there certainly is an emphasis on digital entertainment. EBay, Yahoo and Google all have campuses in the Santa Monica area, while Electronic Arts has a big studio in Playa Vista.
But the fact is that venture capital dollars are relatively evenly spread among an array of industries. In Los Angeles and Orange County in 2005, the leading categories were for semiconductor start-ups, medical device and equipment makers and software companies, each getting about 14 percent of the dollars, according to the venture capital association. Another 11 percent went to media and entertainment companies.
Venture activity in San Diego was somewhat more concentrated, with nearly 50 percent of money going to biotech start-ups, 15 percent to medical device makers and 13 percent to software companies.
Investment in New England is concentrated in four industries, with 24 percent of 2005 dollars going to software and 22 percent to biotech. Silicon Valley had 23 percent invested in software, 14 percent in biotech and 13 percent in semiconductors.
”It is not just one type of technology that is driving the Southern California region,” Mr. Heesen said, noting such diversity can make for a more sustainable environment.
Another factor helping the region is telecommunications and other technologies that allow entrepreneurs and their employees to work from remote locations, said Jim Armstrong, managing director of Clearstone Venture Partners, a Santa Monica firm that has backed such companies as Overture, MP3.com and tickets.com.
Mr. Armstrong said Silicon Valley long held an advantage for venture capitalists in that it had a critical mass of skilled technical workers and thinkers. But now, Mr. Armstrong argued, a company can have its core executives and entrepreneurs in Southern California but use telecommunications to work with far-flung entrepreneurs.
Presently, he said, his firm is working with a software company called Integrien, which has headquarters in Orange County but has a core of mathematicians based in Armenia who spend stints in Southern California.
”Previously, I had to find a whole company,” Mr. Armstrong said. ”Now I can find a kernel and effectively build a company from here.”
Mr. Heesen, president of the venture capital association, said another factor helping the region was that local universities, like the University of California, both the San Diego and Los Angeles campuses, and the California Institute of Technology have learned from Stanford University about how to transfer technology from higher-degree programs into the private sector.
Also, Mr. Heesen said, it is easy for venture capitalists to travel between Silicon Valley and Southern California. Indeed, Mr. Armstrong said the inquiries were growing from his brethren up north who were eager to talk to him about working together on deals investing in Southern California start-ups.
The growth in investment dollars in Southern California comes as the New England region has become less alluring to some venture capitalists. Charles R. Lax, managing general partner of GrandBanks Capital, a venture firm in Newton Center, Mass., a Boston suburb, said he was looking increasingly outside the New England area to invest capital.
The reason, he said, was a rise in the cost of living and doing business. ”It’s hard to move people here and it’s hard to keep people here,” he said. Mr. Lax said his firm was still focusing its deals on the East Coast.
As for Mr. More, he said Domain Associates, which is in the process of raising a $700 million fund named Domain VII, was doing about 40 percent of its deals now in Southern California, up from 25 percent historically. He said the company was seeing a steady flow of opportunities.
The region, he said, ”feels like it has more critical mass.”
