Benjamin Kuo’s Blog

This morning, we published the results of an extensive study of the impact of venture capital companies on Southern California in terms of exit values, finding that exits from VC-backed firms between 1995 and 2009 generated an astounding $48 billion (billion with a capital B) in value.

The study, which was conducted by Jon Funk of Ocean Road Partners (also  of Allegis Capital), used data from our own venture capital database, additional data from Dow Jones/VentureSource, as well as private data collected by Redpoint Venturs’ Greg Martin.

The exits have been written about before (ie., MySpace, Shopzilla,  Rent.com, Lowermybills, etc.) but this is probably the first time anyone has tallied up exactly how much value has been generated from venture investments here, at least in terms of investment value. The related impact — in terms of jobs and employment, additional economic value, etc.–hasn’t been calculated, but is bound to be a multiple of that $48 billion. Small wonder then, that there are so many states/counties/cities eager to attract high tech companies. Southern California has been lucky in that it has developed a number of clusters where there are now self-sustaining groups of technology companies, helping to bolster the region’s employment and wealth.

It also points to, in my personal opinion, the reason why, as a nation, we should be encouraging venture capital and similar investments in startups — the multiplier effect. It’s clear that even just a few very successful companies here can have an out sized effect on the region and its future. In the coming weeks, we’re planning on having Jon Funk further detail the insights he’s gained out of his extensive look into the exits here in Southern California.

Venture capital rating site TheFunded released their 2009 “most loved VCs” list via TechCrunch Tuesday — with a surprise, in that they actually had some Southern California venture capitalists ranked on the list.

The SoCal folks I noticed on the list:

2. Mark Suster, Partner at GRP Partners, rated 4.8571 by 7 CEOs

23. Mark S. Menell, Partner at Rustic Canyon Ventures, rated 4.3333 by 12 CEOs

49.  Stuart MacFarlane, Managing Director at Momentum Venture Management, rated 4.1667 by 6 CEOs

53. Michael Kim, Partner at Rustic Canyon Ventures, rated 4.1538 by 13 CEOs

84. David Min, Principal at Steamboat Ventures, rated 4 by 5 CEOs

To some degree, these lists are mostly useful as a rating of how “friendly” a VC is to listening to your deal, and on how well their “you’ve-got-a-good-idea-but-we’re-not-interested” skills are–plus what portion of their deals actually have rated them in TheFunded. I’m surprised ANY VCs end up on this list–not because they’re not great folks, but because they’ve got to tell 99% of the entrepreneurs they meet that their particular VC deal just isn’t for them, without getting them bent out of shape  (not an easy task).

A couple of Tuesday links:

• Wiring Los Angeles (John Savageau) – a look into how downtown Los Angeles became a telecom hub, converting empty office space into one of the most densely connected telecom hubs in the world
• VC Funding Season Ends Next Week (Mark Suster) – Yes, there is such a thing as VC funding season, and it’s about over for this year.

An interesting interview with Google CEO Eric Schmidt in the Wall Street Journal today has him citing Silicon Valley’s weather as one of its key differentiators:

When I’m asked about this, and I’ve been asked this for years, I answer this the same: It is the weather. There’s a reason why generations of young people who are willing to challenge assumptions and so forth have ended up in the Bay Area, and the weather is not a small part.

Schmidt also mentions world class universities, an effective venture-capital industry, tolerance of failure, and a global perspective as some of the key things which make Silicon Valley different. Not that Southern California is hoping to overtake Silicon Valley, but perhaps some of the parallels here are the reason we’ve also done as well in attracting and creating startups. (Arguably, SoCal has one up on Silicon Valley on weather, has far more extensive global ties, equally prominent research universities, but a smaller–albeit fairly well developed–venture capital industry).

The Los Angeles Venture Association has launched a new entrepreneur and startup focused event next month, at their Meet the VC event, which will allow entrepreneurs to get to meet pretty much every one of the local (and some non-local) venture funds in a “speed dating” session. A few of the folks involved have told me there’s looking to let entrepreneurs in the area know about this opportunity, and are inviting them to apply for a spot at the event.

Entrepreneurs tell me that one of the biggest barriers of entry to funding is getting face time with venture capitalists; it looks like LAVA is looking to overcome the lack of time (on the side of venture capitalists) and the lack of connections (on the entrepreneur side) with this, and it might help increase the probability of deals closing here in the area. In nothing else, the fact you’ll have all the venture firms in the same room means that you’ll overcome one of the biggest barriers to deal flow in Southern California’s high tech and venture ecosystem, which is how spread out we really are (and associated traffic delays).

The event is being held on November 17th.

Not getting enough of Jason Nazar, founder of Santa Monica-based DocStoc, at his many Startups Uncensored events recently? Nazar gets the spotlight, pitching Kara Swisher in this video.

An interesting chart in today’s report from the NVCA on venture capital’s impact on the U.S. economy shows the aggregate amount in venture capital–in billions– invested in the U.S. since 1970:

It’s interesting to note that — if you look all the way back to 1970, how Southern California isn’t all that far up in the list versus Boston, the Southeast, etc. I suspect if you’d weighted this chart to more recent funding (say, the last 10 years) it would show the relative growth in our area vs. other parts of the country in terms of venture activity.

The report also noted:

California perennially tops the list of venture impact regions – in part because of momentum it has built from decades of venture investing. The state’s continued strength flows from a number of factors. First, its venture community invests in companies across multiple sectors… California has developed more than one venture hub: the aforementioned Silicon Valley in the north, San Diego in the south, and a burgeoning new corridor in Orange County…

Interestingly enough, they’ve lumped Orange County and Los Angeles together here as the “Orange County” corridor, and split out San Diego. I’d actually argue you either put us all together (Santa Barbara, Ventura County, Los Angeles, Orange County, and  San Diego) or split us into three or more areas (maybe Santa Barbara to Los Angeles, Orange County, and San Diego), to more accurately figure out where activity is. But, given the cross over at all of the borders (ie, the Southern most companies in Los Angeles are very close to the northern most companies in Orange County, Southern Orange County  firms are really close to Carlsbad, La Jolla, etc.) it’s really better to just throw us all in together to capture the activity here.

Mark Averitt, a venture capitalist at Okapi Ventures, has posted an open letter to Congress about pending legislation — the Privacy Fund Transparency Act — which threatens to derail the venture capital industry. Well worth a read.

Red Herring recently published their list of Top 100 Global Venture Capitalists ostensibly to help people identify the most successful VCs. The handful of Southern California firms to get into the list were GRP Partners (#23), Redpoint Ventures (#39), and Zone Ventures (#100).

Leaving argument about how these lists typically are constructed (who knows who, brand awareness, etc. tends to weigh pretty heavily in most of these “top 100″ lists, as opposed to any numeric weighting of ROI, etc.), the list is illuminating because, as a broad measure, it does show the difficulty of actually identifying who are the right investors to talk to in a market. I’m often asked–by experienced, second-time-around entrepreneurs–who the “tier one” venture funds are, here and elsewhere. By what measure? By return on investment? By entrepreneur-friendliness? On likelihood of investing in a venture? By connections to industry? On name brand prior successes? And should a venture fund even be ranked if they no longer are investing or are in the midst of fundraising with no capital available until they do?

In some cases, the firms with the best track record, financially, might be the least likely funding source for an entrepreneur; they might be too busy, have too many opportunities, or be too picky on their opportunities to mesh with an entrepreneur. On the other hand, a firm most likely to fund a startup might have no exit record, and not show up on a list anywhere.

In my mind, there should actually be two lists: the top VCs from a limited partner’s point of view (picked purely as you might pick any financial opportunity, by prior success, the management, etc.); and the top VCs from an entrepreneur’s view (by domain knowledge, likelihood of funding your deal, by industry contacts). The two may or may not intersect.

I had an interesting conversation yesterday with a startup founder, who mentioned he was planning on talking with venture capitalists from Northern California, because he thought that they would be much more interested in a consumer Internet startup than VCs in Southern California.

It as fascinating to me, because there have been so many investments and successes in consumer Internet deals, particularly from venture capitalists in Los Angeles–none of which apparently had hit the radar of this particular entrepreneur. I’ve actually found that this is an (unfortunately) pretty common thing to hear from entrepreneurs I meet.

Why is this? I think it boils down to the classic disconnect between entrepreneurs and VCs. Many, many entrepreneurs are coming up from their narrow, respective industries, and if they haven’t raised capital before do not know the people, local funding sources, or even service providers. They’ve developed contacts and know people in their own industry, but not with sources of financing or venture capital. As a result, when they first starting looking for funding they tend to run into all of the coverage and links to Sand Hill Road. Silicon Valley has a lot more “brand equity” in terms of the high tech/venture business compared with Southern California, and it shows. I’m not sure what the solution is here, but I’d love to figure out how to make those folks more aware of the local resources here, and make it all that more likely that they’ll keep and grow their businesses locally.