2014-02-27

Co.Labs

Los Angeles Is A Sleeping Software Titan That's About To Wake Up

I'm sick of hearing that this city is somehow behind Silicon Valley.



Los Angeles will never be Silicon Valley. Too often when they're compared, L.A. gets the short end of the stick.

As a native Angeleno I get upset when people bash my city’s tech scene from thousands of miles away. I've watched it my whole life up close. The city of angels is very much a startup town. Biotech, aerospace, renewable energy, transportation, manufacturing, the defense industry, video games, e-commerce. They’re all just as much L.A. as Hollywood is. But in a strange twist, these are all facts the outside world largely doesn’t know about--and that’s because the city has an image and marketing problem.

We made a major marketing mistake: We Southern Californians spent so much time and money exporting the Hollywood brand that we've convinced everyone that this is a one-industry town. Call it cool-washing, but we've hidden all the brains here under piles of beach sand. Like we're all Botox-injected, palm-tree-dreaming car addicts shuttling between our luxury cars to lounge by swimming pools and tan. There are plenty of brilliant, pale, intellectual people here. Concealing that fact is a Keyser Söze move which--you have to admit--takes a pretty brilliant, creative culture to pull off.

First: An Innovation Inventory

Top-tier engineering programs at CalTech, USC, UCLA, and Harvey Mudd make Southern California a veritable farm system for startups: AdWords and AdSense were born here. And so was the Internet. NASA’s Jet Propulsion Laboratory in nearby Pasadena builds some of the most innovative devices sent into space--and even hosts an accelerator with the State Department and USAID. Out in the desert, the much-maligned solar industry is quietly gaining traction with companies like SolarCity, Caelux Corp., and Greenbotics.

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Down in the South Bay, Elon Musks’ moonshots SpaceX and Tesla Motors are ramping up, and so are once-little-known startups turned future blue chips like messaging apps Tinder, Whisper, and Snapchat, which just hired Google’s former engineering director, Peter Magnusson.

The clock is ticking for an IPO from these companies--or a major exit. Despite press that may tell you otherwise, the city has had history in that department.

Riot Games was acquired by Tencent Holdings for $400 million in 2011. That same year, Salesforce competitor Cornerstone OnDemand went public--it now has a market cap over $1 billion. Last month the ad network Rubicon Project filed for a $100 million IPO.

Los Angeles county saw $871 million in venture funding in 2012, and a new startup born every 40 hours, according to research from Built in LA. Forty-three companies were acquired in that period.

Last year, numbers were even higher. Over $1 billion was raised in 2013, with over 100 companies collecting at least $1 million in capital. The e-commerce site JustFab raised two rounds totalling $55 million. Content provider Edgecast Networks raised $54 million before being gobbled up by Verizon for $350 million. And let’s not forget new media darling Snapchat. The company raised $123 million before 23-year-old cofounder Evan Spiegel turned up his nose to a $3 billion offer from Facebook.

So...why doesn’t the city get any respect? Why is everyone still treating Tinseltown like the tech equivalent of Rodney Dangerfield? The answer could be as simple as the soil the city was built on.

Is L.A.'s Geography Problem Really Its Hidden Strength?

“A lot of people try to defame us,” says Howard Marks, the cofounder of video game giant Activision, and the chair of the StartEngine accelerator. Marks, who moved Activision to L.A. in 1991, says a big exit would help change the image of what he calls “L.A. discount syndrome,” lower salaries, valuations, and sales for companies and entrepreneurs than they would receive in Silicon Valley. He estimates valuations are about 30% less in Southern California, with high-level personnel like engineers receiving a 10-15% cut.

“The only reason is because of geography,” he says. “A lot of people will tell you that’s not the truth. It is.”

The trade-off, he says, is culture and lifestyle, and more importantly, employee loyalty. Because there are so many companies tightly clustered together up north, high-level talent is often poached and competition is much worse.

“A big exit would help, though I’m not a fan,” Marks says. “If you sell a company, most likely to companies not based in L.A., what happens is the talent eventually leaves and the company is no longer what it was. What we want is a company to grow.”

Growth is why a company like Snapchat is on the right course, Marks says. “It takes strong personalities to walk away from a big deal. If the whole sole goal is to reach exit level, we’ll never reach the level of success we want.”

“There are many benefits to being here that are non-financial,” explains serial entrepreneur and Pasadena native Alex Benzer, who recently launched the anonymous video service Viddme after selling the custom social networking platform SocialEngine in December. “People are less afraid to sell, they’re more experimental.” Plus there’s an “advantage to being outside of the echo chamber of Silicon Valley,” or even Santa Monica. “We can really focus on building stuff. Downside is it’s isolatory.”

That’s true, but isolation has created niche pockets of specialized sectors. Santa Monica is known for e-commerce, the South Bay and Playa Vista for video game companies, YouTube, and accessory giant Belkin. Hollywood is home to social media publishers like theAudience and WhoSay (helping traditional media reach new audiences through social). Out in Valencia, famous for being the home of Six Flags Magic Mountain, big-time 3-D printing and manufacturing is starting to take root.

Regional Power

With the piggyback moniker Silicon Beach, Santa Monica may be grabbing the headlines, but the real players are inland. In 1996, Caltech graduate Bill Gross founded the Southland’s first accelerator: Idealab. Almost 30 miles away from the beach. In Pasadena.

Gross has been developing, growing, and selling companies for decades, creating and running more than 125 startups with 40 IPOs and acquisitions. In 2003 he sold the pay-per-click-focused Goto.com to Yahoo for $1.6 billion.

The mix of top local education and the evolution of startups citywide has Gross optimistic. One of his new ventures with Idealab, UberMedia, is working on inference advertising, providing location targeted mobile adverts, based on where you are and your interests.

“There are now so many companies, and so many successes, and now quite a few IPO's, and so many great colleges, that we’re really starting to have some critical mass,” Gross wrote in an email. “After the Rubicon IPO, and someday maybe the Snapchat IPO and then a few more, we’ll really have a lot of experienced teams that can continue to ramp new homegrown L.A. startups.”

Is L.A.'s Past A Window Into Its Future?

“This is a story of tribes formed five to seven years ago, and now they’re starting to return,” says Mike Jones, the former CEO of Myspace turned head of Science, a hybrid accelerator that's more corporation than incubator.

Jones and other high-level alums of the “Myspace mafia” didn’t turn L.A. into a social media capital--but they did pave the way for the web’s commercialization.

“It (Myspace) should have been Facebook, but it didn’t become that,” notes entrepreneur turned investor Mark Suster. Because Angelenos weren’t able to get as much startup capital as their Northern cousins, it forced them to turn a profit faster.

“The monetization of the Internet started in this town,” Suster says emphatically.

Richard Rosenblatt founded Demand Media (before recently stepping down). Chris DeWolfe created Social Gaming Network. Amit Kapur, Jim Benedetto, and Steve Pearman built the interest graph site Gravity. Josh Berman teamed with Diego Berdakin to launch the celeb-driven e-commerce site BeachMint. Ross Levinsohn became an interim CEO of Yahoo before taking the reins of the Guggenheim Media Group, publisher of the Hollywood Reporter, Billboard, and Adweek. Adam Bain is now the president of global revenue at Twitter.

Then there are lesser known successes like the six-year-old Swagbucks, a fully bootstrapped El Segundo coupon site that awarded members $55 million in rewards. CEO Josef Gorowitz attributes his company's staying power to pure hustle. Since they didn't have VC money, it was succeed or die, an environment Gorowitz calls "ideal for growth."

Jones, whose own venture at Science has grown a stable of commerce-focused lifestyle companies, links the greater success of the city to the peers he cut his teeth with, calling the now veteran entrepreneurs masters of “chain startups,” who aren’t in it for the quick buck.

Lots of companies are now “worth a few hundred million,” Jones says. The question now is whether “we can build some companies that are worth billions.”

Friends In High Places

Mayor Eric Garcetti wants to make sure that happens. The self-proclaimed geek is working to continue to make the region attractive to entrepreneurs. His open data initiative is collecting traffic, crime, and medical care data, allowing people to see how every dollar is spent by the city. There’s also a push to create a citywide broadband network that would rival Google Fiber. To help him further these goals, last month Garcetti hired Peter Marx, a former Qualcomm exec, to serve as L.A.’s first chief innovation technology officer.

Garcetti says Marx will promote tech’s economic development and integrate people with changing city services. That means rethinking modes of public transportation, car and bike shares, pedestrian paths, and the above-ground Expo Line.

“The external benchmark is keep the startup culture and grow into the expansion culture for this explosion of tech firms,” he says. “People have such low bars of expectations for government. Well, imagine if we did meet their expectations?”

Government help includes startup incentives allowing new tech firms to pay the lowest rates for the city’s business tax, state tax breaks for manufacturing, and a workforce investment program wherein the city pays new employee salaries during training periods.

When you hear Garcetti speak about his plans, he sounds genuine in his desire to make the city the tech hub it could--or, according to him, should be.

“We have so many raw ingredients here but we’ve never put the narrative together,” Garcetti says. “L.A. is where the best storytellers and story makers have always come from, or come to. So that’s in some ways our competitive advantage. And that’s why I think for a lot of tech companies that are established, they’re finding they can’t afford not to be here. This is the kind of town where you can have green tech, digital tech, bio tech, new media, all intersect together--with analog industries like fashion or music.”

Undoing The Cinderella Complex

Angelenos need to stop worrying about comparing themselves with Silicon Valley, says Suster. Which means focusing on what they have--not what they don't.

“We can build amazing businesses but this is not Silicon Valley,” he says. “This is a town built on entrepreneurship. It’s a town built on creativity. So we don’t have any reason to try and pretend to be someplace else.”

Suster says the growing synergy between Hollywood companies and startups will further commercialize the web and push the city out of its Cinderella role.

“What does it take to build great companies,” he asks. “You need the combination of things that don’t exist anywhere else in this country. Storytellers, sound, writers, actors, costume, makeup artists, and people who can then package that and sell brand integration and advertising. L.A. is the dominant place. That’s why the studios haven’t been able to build this stuff themselves. It’s really the cross between digital media skills, and traditional content creation that doesn’t exist anywhere else in America than Los Angeles.”

[Image: Flickr user William F. Yurasko]