VentureBeat

Editor’s note: This is an op-ed piece by Sumant Mandal who is managing director at Clearstone Venture Partners in Santa Monica, Calif.

There’s no doubt that California is regarded as the “mecca” of venture capital in the world with VC activity just in the first quarter alone representing 44 percent of the nation’s deal flow and 48 percent of capital invested, according to VC analyst group VentureOne. Silicon Valley has been synonymous with venture capital for as long as I can remember and for good reason. The valley has a balanced ecosystem of entrepreneurs, university research, angels and VCs. Combine that with good weather and the lure of past successes, and it’s no wonder talented technologists make a beeline for it.

But, there’s a shift happening that’s been quietly gaining momentum. Did you know that Southern California accounts for two-thirds of the state’s GDP, making it the 15th largest economy in the world? (As a whole California is the sixth largest.) This past year, the region saw the second highest level of capital investment in the U.S. (beat only by Silicon Valley) with 1.10 billion invested over 66 deals, the first time investments have topped $1 billion in a single quarter since 2000, reports VentureOne.

We’ve been headquartered in Southern California (first as Idealab) for nine years. Half of our portfolio companies are in the south while the other half are in Silicon Valley near our Sandhill office. Having cultural insight into both regions during this time, we’ve witnessed an emergence of a brand new SoCal community: increased VC capital, work force, technology development and a new and noteworthy breed of start-up. We’ve invested, incubated, and supported stellar portfolio companies in both regions and I can say with certainty that, dollar for dollar, venture returns down here will match up north with ease.

We view SoCal as five distinct markets:

1. The Santa Barbara corridor has long been the bastion of deep computer science initiated by research out of UCSB.

2. The Westlake Village area has developed a reputation for service-oriented companies and innovative software companies. There’s a great pool of talent in that area and our own United Online/netzero has been hailed a flagship success story.

3. Orange County resembles the Silicon Valley of 20 years ago, with people spinning out of large semi companies and building products for the enterprise and the carrier buying ecosystem.

4. San Diego thrives on biotech and the wireless ecosystems.

5. Los Angeles itself has distinct areas of expertise, with Pasadena’s (also where Idealab was located) deep history of technology stemming from Caltech and successful companies including Overture. Over on the Westside of things near Hollywood and, more importantly, Santa Monica, there’s a thriving ecosystem of media-oriented web companies staffed by young, talented, no-holds-barred staffers. It didn’t take long for NorCal companies such as Google and Yahoo to open offices where they could hire people who understood how to package and monetize content. Companies like The Rubicon project, Mahalo, ThisNext, DemandMedia, EVO and others are spreading their wings and creating the next generation of success in the space.

There are many reasons why the Southern California market is more interesting than it’s ever been. Changes we’ve sensed and tried to harness for a long time are now coming to fruition, especially over the past two years. Here are some specific convergent trends that are causing this industry shift.

Massive interest in media being consumed online – LA is it. For a long time people (including us) complained that, in general, the media industry was filled with “deal makers” and lacked the backbone of those who understood the process of company building for equity value. Entertainment is a hits-driven business, and that lends itself to the structure that exists in Hollywood. However, it seems a switch went off about 24 months ago. Companies like YouTube, Bittorrent, Veoh and many dozen others have been created to deliver value to holders of equity. And though not all those companies were created in Southern California, they play really well into what talent in this part of the world does well – creating, packaging, delivering and monetizing content.

Stellar successes - The last 24 months have shown that large, industry-changing venture-backed companies can be created in SoCal. We’ve had Overture, MP3.com, United Online, Internet Brands (Carsdirect) go public in our own portfolio here over the last few years, but if we look around we also see companies like MySpace/Intermix becoming the trendsetter in social networking right out of our backyard and Neopets creating a very successful online business. Shopzilla, Oversee.net and Lowermybills.com have created an ecosystem of success that new startups are focused on emulating.

Repeat entrepreneurs – A flood of people who’ve been through the story before are doing it again. Some join up with prior co-workers from former start-ups, some relocate to start something new, others are seeding and advising. There’s a sudden abundance of accessible wisdom infusing the community. It’s as if someone or something opened the spigot.

Networking – This is one of the most significant changes to the Southern California region. There’s always been an effort to harness the common wisdom and share knowledge through the Southern California venture association that Jim Armstrong (MD at Clearstone) helped start. But now there isn’t a week in which we don’t hear about an opportunity to bring together business leaders looking to start something new at the nexus of media and technology.

Bottom line is that SoCal is happening. There’s a lot to be excited about. As an economy that’s driven by business (as opposed to technology,), the area is getting more and more relevant to broader global business. The companies have a new aggressive feel to them. It feels like there’s, literally, a world of opportunity. I know for a fact that most of my partners who previously would have jumped onto that 6.15 a.m. Southwest flight to invest in a NorCal company now think twice. I know I do.