2014-02-11

Co.Labs

How Los Angeles Is Kind Of, Almost A Startup Town

All it takes is one IPO to make it official, say locals, and it feels like it's right around the corner.



Los Angeles has never been a real tech titan. The city has yet to breed its own Facebook, Google, or Tumblr, whose vast successes generated sophisticated tech ecosystems in San Francisco and New York.

The big question lingering over every coffee shop and meetup in Silicon Beach right now: Will Los Angeles’s growing hotbed of startups finally yield a blockbuster company? There are reasons to be optimistic. Snapchat recently turned down a $3 billion buyout offer from Facebook, a bold move for any startup.

"Have you ever heard of an L.A. company doing that?" said Mike Jones, former CEO of Myspace and founder of Los Angeles "company-builder" called Science Inc. "We’ve heard of Google or Facebook turning it down, but not L.A. companies. That’s a good sign." The Los Angeles tech scene has grown at a dizzying pace in the past few years. Los Angeles saw 130 technology venture capital deals in the first three quarters of 2013, valuing a total of $943 million, according to CB Insights. This is a 60% increase of $591 million valued from 95 deals for all of 2010.

"I was in New York at the beginning of Foursquare and Tumblr, and that was a great moment for New York," said Courtney Holt, COO of Maker Studios, one of the hottest startups in L.A.

"(In 2012) I started to feel that energy here," Holt added. "There’s a lot of companies with a lot of wind at their backs."

A Map Of Startup LA

So where are all of these entrepreneurs planting their feet?

Los Angeles is a sprawling city. Bad traffic and isolated neighborhoods make it difficult to form a tight community. Rather, several pockets have emerged across the city. Eli Portnoy graduated from the TechStars accelerator in New York and then moved to L.A. to start his company, ThinkNear. "When I was out in New York, there was a very concentrated area where startups were. You’d walk into a coffee shop and bump into an investor. That happens less in L.A."

Santa Monica is undeniably the densest patch, earning it the title "Silicon Beach." Silicon Beach houses 36% of all L.A. startups, according to represent.LA, a website that tracks startups in Los Angeles. Santa Monica boasts Snapchat, Hulu, and Riot Games, as well as popular local incubators Launchpad LA, Science Inc., and MuckerLab. Five miles east lies Culver City, another hip breeding ground. Pasadena, West L.A., Orange County, and downtown L.A. have also developed into budding hotspots.

The tech community is making strides to sew these neighborhoods into a cohesive group. In January 2013, a members-only club tailored toward the tech crowd opened in Santa Monica. Local entrepreneurs such as BeachMint founder Josh Berman invested in 41 Ocean, an upscale beachfront property off of Ocean Avenue. The Spanish-style courtyard restaurant attracts entrepreneurs, investors, and venture capitalists alike. It’s become the unofficial clubhouse for the tech community, says Angelo Sotira, CEO of online community DeviantArt. 41 Ocean is just five blocks away from Third Street Promenade, where hip coffee shops are another magnet for the Silicon Beach crowd. "The promenade is probably the number one place to find people," says Portnoy.

What's Harshing L.A.'s Buzz?

But there’s a major roadblock that keeps Los Angeles tucked into the shadow of the Valley: money. Namely the dearth of it.

We're not talking about rich people—we're talking about capital. Venture activity in Los Angeles pales in comparison to Silicon Valley (as everyplace else on Earth does). Los Angeles has about one-tenth of the venture capital investment of Silicon Valley, according to incubator Be Great Partners’ 2013 L.A. startup industry report. Justin Choi, CEO of Nativo, named the hottest startup at L.A.’s November 2013 Tech Summit. Choi recalls that two years ago, when meeting with a VC firm in San Francisco, the partners expressed interest but told Choi there was one problem: "You’re all the way down in L.A."

Choi calls the incident "disheartening," but says he doesn’t hear these comments anymore. Silicon Valley funds are now visiting Los Angeles regularly to stake out local prospects. Lightspeed Venture Partners, a Menlo Park fund, backed Snapchat and Whisper. There’s still a severe lack of locally based investors. There are now roughly 50 angel and VC firms in L.A, making an average of about $4.07 million into each startup venture, according to Be Great Partners. "There’s a thriving angel community emerging, but it’s still thin in terms of pure L.A. based VC funds," says Jones.

That Hollywood DNA

Hollywood is deeply embedded in the DNA of Los Angeles, and the tech world is no exception. Hollywood and startups are becoming increasingly intertwined as technology seeps into the core business that ran this town for the past 100 years. Entertainment, adtech, e-commerce, and media dominate the startup industry. Walter Driver, CEO of Scopely, says this is no accident.

"L.A. is about producing cultural experiences," Driver said. "Snapchat, Whisper, Tinder, Scopely. They’re about finding new ways for humans to interact with each other." Celebrities are on board. Ashton Kutcher is one of the most active angel investors in town. Leonardo DiCaprio, Justin Timberlake, Kim Kardashian, and many others have dipped their toes in the water with investments and endorsements. Hollywood’s golden hand also shapes the talent pool. The classic stereotype, that every waiter you meet in L.A. is an aspiring actor, may need to be updated. Hopeful actors, writers, and producers are catching on to the job opportunities in tech.

These are inexpensive, creative risk-takers, looking for flexible schedules and quick paychecks. Portnoy says it’s "an easy match." "An actor or screenwriter has a dream, but in the meantime they want to pay the bills, and they want flexible hours," he explains.

Others make a longer-term switch. Walter Driver was a screenwriter before founding Scopely. Courtney Holt studied film and worked in the music business for decades before joining Maker Studios.

It Takes An IPO

Even the most devoted Angelenos admit that Los Angeles will probably never be the (Silicon) Valley. Still, there is hope that a game-changing company can nudge Los Angeles out of its little- brother status. According to Mike Jones, L.A. needs a big name to "really go for it," launch an IPO and breed a mature tech ecosystem.

"One of the magic parts of the Valley is that someone like Zuckerberg says: I’m not going to sell. I’m going to build a huge company here," said Jones. "And then he (Zuckerberg) creates billions in wealth, and an ecosystem is born."

Whether or not it blossoms into Valley-esque proportions, Los Angeles is carving out an identity. As Walter Driver puts it, Hollywood is "the business of providing an escape, a peek into other realities."

"That’s why film was invented. And these companies that are coming out of L.A. are a part of that," he says.

It’s yet to be seen whether L.A. will get its long-term billion-dollar asset, although technology blogs are teeming with rumors that Snapchat or Rubicon will go public soon. Los Angeles is certainly approaching a tipping point, says Holt: "It’s a fascinating moment in time for us here."

[Image: Flickr user Ron Reiring]




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