This is research about Venture Capital Growth in Southern California from California State University Dominguez Hills. This research is the 2012 winner of the CSUDH Student Research Competition. It is also the winner of the 2012 CSU Statewide Student Research Competition. Abstract: Student Author: Bree Nguyen, CSUDH Faculty Mentor: Dr. Tayyeb Shabbir, CSUDH Department: Accounting and Finance Venture Capital Growth in Southern California: Becoming Silicon Valley Venture capital is an important driver of technology innovation and entrepreneurial undertakings in the United States and is responsible for funding high profile, revolutionary companies such as Google, Microsoft and Facebook. While venture capital is typically associated with Northern California’s Silicon Valley, in recent years, many other U.S. regions have emerged as centers for venture capital investments including Southern California. The primary goal of my research is to conduct an analysis of venture capital growth in Southern California in terms of venture capital dollars invested in the region, its relation to Silicon Valley and the viability of creating a So Cal ”Silicon Valley”. Past efforts to “recreate” Silicon Valley have failed – these factors will be analyzed and I will argue that the young venture capital market in Southern California can succeed. My study analyzes the venture capital growth in Southern California by focusing on two of the most rapidly growing funded industries in the region, Internet and Energy, and identifying regional and industry specific determinants of growth. The results reveal that there are determinants of growth that are unique to Southern California and unique to its industries. These determinants have strong correlations when analyzed together at a regional-industry level rather than individually. This study illustrates a model of venture capital growth unique to Southern California’s Internet and Energy industries to offer a different view than by using Silicon Valley as a model and a benchmark alone.

1. Venture Capital Growth in Southern California: The New ‘Silicon Valley’?
Research Summary
By Student Presenter: Bree Nguyen
California State University Dominguez Hills
Faculty Advisor: Dr. Tayyeb Shabbir
California State University Dominguez Hills
Venture capital facilitates commercial viability of high risk-high reward innovative ideas. This
naturally fosters new technologies and the institution of venture capital has brought us game-changing
companies like Intel, Microsoft, Google, Facebook and more. Traditionally, venture capital has been
centered in Silicon Valley representing nearly 40% of all venture capital dollars today and is responsible
for some of the most well-known venture backed technology companies. However,in the last few years,
venture-backed companies that have developed out of other regions in the United States have been
stealing some of the spotlight. Groupon.com is based in Chicago, IL and has been valued at $1.35 billion
in 2010. Some of the newer entrants are Southern California venture funded companies such as Santa
Monica based Demand Media who filed an IPO in 2011 netting $77.2 million and Los Angeles based
HauteLook.com was recently acquired by Nordstrom for $270 million. In fact, looking at venture flows in
2010, the top three regions are as follows: Silicon Valley represents 40% of venture dollars, Boston/New
England represents 11.6% and Southern California represents 11.1%. While Silicon Valley and New
England are still leaders in venture capital activity, their growth has slowed in relation to other regions.
Venture capital growth is happening elsewhere. Comparing these regions’ ten year growth rates,Southern
California shows the biggest percentage change in venture flows with nearly a 30% change from 2000
whereas New England has leveled with only a 2.13% change, and Silicon Valley is behind with a 21.1%
change. This study examines this shift and examines this growth of venture capital growth in Southern
California.

2. Venture capital growth is important to fuel economic activity in regional areas. Venture capitalis
a significant contributor to the creation of new businesses, new industries and new technology (Mason),
or to sum all of these, innovative activity (Rosenberg). Innovative activity has been identified as the
“single, most important component of long-term economic growth” (Rosenberg). Venture capital in
Silicon Valley has supported local economic activity and education. Venture capitalists and start-up
companies have created systems of research programs and teams at the local universities including
Stanford and UC Berkeley, funding projects and creating apprenticeship programs for young
entrepreneurs. The perception of availability of venture capital in the region has attracted the most
promising entrepreneurs and technologists to the region creating a culture of innovation. These same
opportunities could be fueled in Southern California. If there is natural venture capital growth emerging in
the Southern California region, it is important to identify this so that 1) the region itself can identify the
growth and enact policy appropriately and so that 2) the region can illustrate the opportunities available to
entrepreneurs and labor in these areas.
To analyze the region’s growth, it is important to identify the determinants of venture capital
growth. There has been much literature around these determinants, and this study separates these
determinants into two areas,the supply-side determinants, and the demand-side determinants. The
research that follows begins with the supply-side determinants and analyzes data on the flows of venture
capital dollars to companies.
The funding data comes from two sources. The first source is PricewaterhouseCoopers,a leading
professional services and financial advisory firm, which maintains a database of overall venture capital
activity. However,there are incredible difficulties to identify and maintain a database of business angels
and angel venture capital funding (Mason). Angel investors represent an important group of venture
capital investors who are typically small firms and individuals, which is why they are difficult to track
and there is limited literature about angel investments and limited research involving angel investments.
So, for this study, a second source of data is considered. The second and main source of data used in this

3. study, is the socalTECH.com venture deal database. The socalTECH.com database is a privately
maintained database of venture flows for the Southern California region. socalTECH.com is primarily a
news and information outlet published daily about high tech companies in Southern California. Because
of this, so much of their deal data comes from first-hand sources,the companies themselves, allowing
them to maintain a database of early stage investments and angel investments along with traditional
venture capital investment data. This gives us a much more complete view on the landscape of venture
capital investments in the region.
Understanding the current landscape of the venture dollars in Southern California is the first step
to identifying where there might be growth and explaining the nature of venture capital in the region. The
average first round deal size in Silicon Valley is nearly $2 million more than the average dealsize in
Southern California. When looking at the distribution of venture dollars by deal size, over 40% of venture
dollars to Southern California were to fund first round deals in the early stage or expansion stage of a
company. Early stage and expansion stage investments range in deal size from $20,000 to $10 million,
relatively small for a large portfolio venture capital firm. The average dealsize is quite a bit smaller, but
there are more of them being made. In Silicon Valley, nearly 20% of venture capital dollars to the region
went to fund first round deals worth $50 million or more to a smaller amount of companies. This data
suggests that the inverse distribution of venture dollars is occurring in Southern California compared to
Silicon Valley. In 2010, early stage investing is driving the growth of venture capital in the Southern
California region.
It is apparent that there is venture capital growth in Southern California, and that there are aspects
of this growth that are similar to that of Silicon Valley, but the makeup of this growth is unique. Early
stage capital is active in Southern California and entrepreneurs looking for seed funding should come to
this region to look for capital. With many more small size companies in this region, there are many more
companies competing for dollars and attracting new, wealthy individuals into investing. Analyzing
venture flow data using business angel investment data, which is typically hard to aggregate, sheds light

4. on the uniqueness of the venture capital activity in Southern California. Understanding this will help us
forecast what to expect in the future for Southern California and illustrate the opportunities that are
available for entrepreneurs and investors in the region. Also, by examining the determinants for growth,
we can open up discussion on the determinants that we have the ability and desire to influence either to
help control or fuel growth that may benefit the region. This highlights some other interesting areas of
study that should be identified for future research. It would be interesting to examine early stage capital
itself given the lack of literature and study. Does early stage and business angel investment capital have
the same growth determinants as venture capital as a whole? With many more, smaller investments, the
rate of companies defaulting goes up, how does this affect future growth of a region? Future research
should also explore the demand-side determinants of venture capital and how policy might affect these
factors positively or negatively.
This research will continue to progress by analyzing the venture flows by industry sector and gain
insight into the technology industries that have shown the most growth or decline in the region compared
to other regions. Also, some demand-side determinants will be investigated as they relate to growth and a
forecast of future venture activity will be presented. This summary and presentation will be followed up
by a complete research paper which will be submitted for publication this year. You can continue to
follow the progress of this research at http://www.onetwobree.com/research.

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