Capital battle between the coasts: DIFFERENCES FUEL TENSIONS AS WEST ECLIPSES EAST IN WORLD OF VENTURE FUNDING

BYLINE: Constance Loizos, San Jose Mercury News, Calif.

Dec. 10--When word spread that Facebook's 22-year-old CEO, Mark Zuckerberg, appeared last month at a New York conference for the media elite in a sports jacket, jeans and Adidas sandals, Silicon Valley investors accustomed to sockless entrepreneurs shrugged. East Coast venture capitalists cringed.

"Our entrepreneurs don't show up in flip-flops," quipped Dennis Miller, a venture capitalist at Spark Capital in Boston. "There isn't a look, a uniform, like there is in Silicon Valley. (We're) a little less conspicuous."

Miller calls the difference "reflective of New England's culture," but it's far from the only disparity between the Silicon Valley and East Coast investing scenes, and tension between the two -- which have long clashed quietly over style -- appears to be growing.

The renewed attention on Silicon Valley -- thanks in part to Google's $1.65 billion deal for YouTube and the search giant's $150 billion market cap, bigger than any of New York's major media companies -- is part of the issue.

Facebook and Zuckerberg illustrate another facet of the rift: the growing dominance of Silicon Valley venture capitalists. Though founded on the campus of Harvard University, Facebook moved to Palo Alto, where Zuckerberg raised money from Accel Partners on University Avenue, rather than from any of the dozens of East Coast firms clamoring to back the start-up.

And Silicon Valley's edge may be growing. Venture capitalists here have long outspent their rivals, and the number of firms that call this area home has grown at a far faster rate than in either New York or New England over the last 10 years.

Jeff Horing, a venture capitalist at Insight Venture Partners in New York, jokes that in his universe, where venture firms are dramatically outnumbered by other funding sources, being a VC isn't "nearly as big a deal as in California. We're somewhat overwhelmed by billion-dollar hedge funds and buyout funds. That's where the Harvard graduates are going right now."

"There's considerable evidence that except for biotechnology, where Boston has a strong advantage, the advantage of California is becoming more pronounced," said Harvard professor Josh Lerner, an expert on venture capital and private equity. "There used to be some big winners and some reasonable successes, but the reasonable successes have largely dried up, and the big hits have been concentrated out West. It's exacerbating the differences between Silicon Valley and everywhere else."

Even East Coast VCs acknowledge distinctions. "In some areas, like new media, the quality of entrepreneurs in the East is just lower than in the West," said George Bell, the onetime CEO of Excite and today a venture capitalist with General Catalyst Partners in Cambridge, Mass. "I wish that weren't the case, but Silicon Valley's 40-year history of venture investing is hard to overcome out here," he said.

"The Valley's available infrastructure -- from the VCs to the universities like Stanford to Berkeley, to the many law firms that cater to entrepreneurs, to the amount of press it gets" -- is also unrivaled, added Art Marks, who co-founded the firm Valhalla Partners in Vienna, Va., after 17 years in the Reston, Va., office of New Enterprise Associates.

Serial entrepreneurs

Silicon Valley is further credited with being better at nurturing serial entrepreneurs than other regions. "We have some companies that have spawned lots of successful folks, like (Internet services provider) Akamai," said Miller. "But we don't have the same entrepreneurial families that have come from Silicon Valley companies like PayPal" that have seeded start-ups founded by former employees, as well as produced wealthy investors willing to back them.

In seeming recognition of the Valley's advantages, a growing number of East Coast firms are even planting stakes here. This year, Highland Capital Partners and General Catalyst -- one of Boston's oldest firms and one of its newest -- have both opened offices in Menlo Park. So has renowned venture capitalist Alan Patricof, who founded Apax Partners in 1969 and this year created Greycroft, a digital-media-focused venture firm in New York. "We couldn't be in this business without some presence on the West Coast," he said.

"It definitely doesn't hurt to be in that self-reinforcing circle that is Silicon Valley," said Horing. "We all want a YouTube."

Still, not everyone speaks of Silicon Valley's powerful investing culture in glowing terms or thinks its continued dominance is assured.

Some say there is less self-absorption elsewhere. "New York is more a community of premieres and charities and special events rather than companies running announcement parties about their latest Web sites," said Patricof.

Many East Coast VCs also believe themselves less vulnerable to trendy investing waves, pointing to the preponderance of West Coast funding of Web 2.0 companies. Three of the top five most active investors in those firms are Draper Fisher Jurvetson, Benchmark Capital and Sequoia Capital on Sand Hill Road, according to industry tracker VentureOne.

Marks argues that East Coast firms are more focused on enhancing existing markets, such as "software concerns catering to government contractors, and biotech," while Patricof praises the "many more start-ups in financial services, in insurance, in the employment services area" that can be found in New York.

"It's not the Buck's experience where everyone is drinking from the same water fountain," said Miller of Boston, adding that "Silicon Valley has become very reminiscent of the entertainment industry in L.A., where everybody is bidding on the same hot script."

Disciplined east

Vikram Kashyap -- a former venture capitalist and the founder of San Francisco-based online payments start-up Canopy Financial, which has eschewed venture funding -- agrees. "I don't want to sound like a curmudgeon," said Kashyap, "but there's much more discipline around business models and financials in New York. Financial discipline isn't inculcated into the culture in Silicon Valley. The idea is to raise a ton of money, spend a ton of money, and hope you find the next Google, never mind the considerable detritus along the way."

Even Ray Rothrock -- a venture capitalist who has spent the last 10 years in the Menlo Park office of Venrock Associates and the 10 prior years in Venrock's New York office -- doesn't dispute Miller's characterization. "There's definitely a propensity here to back something more quickly than not. Right now, too few entrepreneurs are getting dinged for asking us to invest without telling us how they're going to spend that money."

"It's very competitive," acknowledged Rob Coneybeer, a venture capitalist whose firm, Shasta Ventures, sits on Sand Hill Road. "Entrepreneurs play firms off one another. Much more than on the East Coast, everyone knows what's being shopped around."

But the intense environment gives Silicon Valley another advantage over East Coast rivals. "Would you rather be in a highly liquid, efficient market, or an illiquid, less efficient market?" Coneybeer said.

Contact Constance Loizos at cloizos@mercurynews.com or (408) 920-5920.

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