The New Economy and the Future Economic Health of Southern

The New Economy and the Future Economic Health of

Southern California

Venture Capital Investments in the Nation and the SCAG Region

Updated October 2001

Venture Capital Defined

• Equity investments made in emerging private companies

• Barometer of regional and national economic health

• Identifies promising industry segments• Predictor of future output, employment, and

wealth growth

Factors Influencing Where Capital is Invested

• Proximity to major research institutions and universities

• Proximity to major international airports • Educated workforce• Proactive government• Venture capital firms located in the area• Cultural amenities

Venture Capital Investments in the United States

• Venture capital investments grew rapidly in 1999 and 2000, with the peak quarter in the 1st quarter 2000

• Investments have dropped drastically in 2001 compared to the previous two years

• California has received 46% of the investment dollars during the 1997-2nd Quarter 2001 time period

Nationally, Investments Peaked in the 1st Quarter of 2001

Venture Capital Investment in the United States, 1st Quarter 1995 through 2nd Quarter 2001

$4.69$5.88

$10.03$11.25

$26.10

$23.51

$21.33

$16.80

$10.11

$8.21

$19.15

$4.59$4.43

$3.64$3.56$3.38

$3.31

$2.34$2.71

$2.26$2.54

$2.25$2.13

$1.51$1.88

$1.23

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

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California is the National Heavy Weight in Venture Capital Investments

Venture Capital by State/Region1997 through 2nd Quarter 2001

National Investment: $188.26 Billion

46%

12%

5%

7%

7%

5%

7%

4%

4%

2%

1%

0%

0%

California

New England

Texas

New York

Southeast

Washington DC

Midwest

Colorado

Northwest

North Central

Southwest

South Central

AK/HI/PR

The SCAG Region Receives a greater percentage of Investments than San Diego...

Distribution of Venture Capital Investments within California2nd Quarter 1997 through 2nd Quarter 2001Total Investments in California: $86 Billion

SCAG11%

Silicon Valley81%

San Diego7%

Sacramento1%

SCAG

Silicon Valley

San Diego

Sacramento

Source: PriceWaterhouseCoopers Money Tree Survey and Ventureeconomics.com

…But SCAG Trails San Diego and the U.S. in Average Per Person Investments

Average Yearly Venture Capital Investment Dollars per Person 1997 - 2nd Quarter 2001

$2,348

$535

$192 $186

$24

$0

$500

$1,000

$1,500

$2,000

$2,500

Silicon Valley San Diego USA SCAG Sacramento/NCA

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Source: PriceWaterhousCoopers Money Tree Survey and Ventureeconomics.com

Regionally, 2000 was the Best Year for Venture Capital Investments.

Venture Capital Investment in the SCAG Region, 2nd Quarter 1997 through 2nd Quarter 2001

$704

$645

$484$508

$639

$257$232

$196$231

$187

$251

$95$123

$145$117

$50

$126

$33$50

$71 $72

$304$301

$944$959$960

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

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This 2-Year View Shows Investment Hot Spots in Santa Monica, Irvine, the South Bay, Pasadena, and the Conejo

Corridor.

Currently, Venture Capital Investments remain Steady with 1st Quarter 2001 and Well Below the Previous Year’s Level.

Discussion - The Double Edged Sword of Venture Capital

• Venture capital investment is the fuel of the new economy and is necessary for future economic prosperity

• Areas without venture capital investment in new economy jobs will lack the highest paying, most wealth generating jobs

• However, venture capital investment inflates real estate prices, limiting the availability of affordable housing

Link to Jobs/Housing Balance

• Venture capital investments tend to flow to areas that are Jobs-Rich...

• ...Despite the fact that housing costs in these Jobs-Rich areas are higher than elsewhere

Future Ramifications

• The SCAG economy is diversified and has not been as adversely affected by the decrease in venture capital investments as Silicon Valley

• In the aftermath of the terrorist attacks on the U.S., high paying New Economy jobs may be replaced with high paying engineering jobs

Future Ramifications

• The defense industry may resurface as a driving high-paying, wealth-generating industry in Southern California