What a Difference a Year Makes: Venture Capital Investments in the SCAG Region in the Second Quarter 2001

What a difference a year does make in venture capital investments. Venture capital firms invested $304 million in companies in the SCAG region in the second quarter of 2001. This amount is less than one third of the amount invested in the region in the second quarter of 2000 ($959 million). The $304 invested also is less than the investment amount of two years ago, in the second quarter of 1999, when investment in the region totaled $508 million. The $304 million invested takes the region back three years to the beginnings of the technology boom, when there was $196 million invested in the region in the second quarter of 1998.

Compared to the previous quarter, the first quarter of 2001, venture capital investments in the region have been steady. Venture capital firms invested $301 million in companies in the SCAG region in the previous quarter.

Investments have become highly concentrated in key technology spots in the region. In the second quarter of 2001, investments were concentrated in the Irvine area of Orange County, Santa Monica/West Los Angeles, the Conejo Corridor in Ventura County, and Pasadena. The Internet-related dot-com technology, new media, and entertainment firms located in the Santa Monica and West Los Angeles area have been hard hit by the technology downturn. This is evident in the small amount of funding in this area that had been the powerhouse of New Economy firms in the region.

Orange County, particularly firms located in Irvine and the immediately surrounding cities, is ascending from the second largest center for high technology to the high technology hub of the SCAG region. The Irvine area specializes in biomedical and technology infrastructure firms. These firms have weathered the downturn in investments better than Internet-related firms in Los Angeles County have.

With so few investments in the region compared to the previous year, companies outside the technology centers did not receive funding in the second quarter of 2001. Notably, no company in the South Bay received funding. Companies in the San Fernando Valley, southeastern Los Angeles County, and northern Orange County also did not receive investments. No investments were reported in the Inland Empire.

Nationally, investment totals fell again from the previous quarter. Within California, investment totals fell in Silicon Valley and San Diego from the first quarter 2001 totals. Investments in Sacramento grew a modest $8 million, from $28 to $36 million.

In summary, the future for venture capital investments is uncertain. While investments in the SCAG region were similar to the previous quarter, giving hope that from this point, investments will increase instead of decrease, the terrorist attacks in this country may send investment levels even lower. The front page of the September 23, 2001, Los Angeles Times proclaimed that the “New Economy is a Thing of the Past.” The focus of the region could revert to the defense industry and the old economy manufacturing

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industries that powered the region’s economy in the past. Either way, the region’s economy is very diverse. This diversity will be relied upon to help the regional economy to remain strong through the instability resulting from the aftermath of the terrorist attacks.

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