Why You Should Start a Company in... Los Angeles

It used to be, if you were serious about starting a tech company, you went to Silicon Valley. But emerging entrepreneurial hubs around the country are giving startup aspirants options. In this series, we talk to leading figures in those communities about what makes them tick. Here, part seven in our series.

Red-carpeted premieres, sun and beaches, smog, Pauly Shore. Okay, maybe not Pauly Shore. But let's face it, when you think of Los Angeles, Internet startups are not the first things that spring to mind.

The city has, however, quietly been home to some of the most successful online companies to date, including CitySearch (sold to Ticketmaster for $260 million in 1998), Overture (acquired by Yahoo for $2 billion in 2003), eHarmony and LowerMyBills (bought by Experian for $330 million in 2005). And that's not even counting MySpace, which Rupert Murdoch famously paid $580 million for in 2005.

The Southern California locale benefits from its easy proximity to Silicon Valley, just an hour's flight away, as well as from the many universities in the area, including Cal Tech, where Intel founder Gordon Moore went to school.

Surprisingly, Hollywood hasn't played a major role in the formation of new companies, which have tended to be in less glamorous though more lucrative areas like lead-generation and service (with obvious exceptions like JibJab and Hulu, a joint venture of Fox and NBC).

Mark Suster, a partner at GRP Partners in Los Angeles, spoke with Fastcompany.com about what makes L.A.'s startup scene so hot.

What makes L.A. a great place for startups?

Let's start with the basics. L.A. is the second largest designated market area (DMA) in the country, so you're starting with a natural talent pool of very interesting people, and also, a market from which to sell your goods and services into.

Number two, necessity is the mother of all invention. And what happened in L.A. is—we're not Sand Hill Road, right? Nowhere in the world is Sand Hill Road. Let me point out what I believe that means. Sand Hill Road has so many venture capital firms and they are so large, and they have been around for so long and they are very closely coupled and tied with Stanford [University]. A little bit Berkeley, but more Stanford to the point where three PhDs graduating from Stanford and a huge idea can get a $20 million check to swing for the fences and build a huge company.

That's not Los Angeles. L.A. is a lot more of: Show me how you're going to commercialize this technology, I want to understand how it makes money. And as a result we have bred a culture of companies that have been quite innovative on making money.

If you look at why Google is so successful today, the overwhelming majority of their revenue is from sponsored search. The company that innovated that model was called Overture. My fund was an early investor in Overture. We built it into a huge company, sold it for more than $2 billion. Google out-executed us, so, you know, hats off and they've been victorious, but a lot of that kind of innovation happens in L.A.

If you look at Google in the way they operate, you have two products, one is called AdWords, one is called AdSense, okay? AdWords is on Google.com, AdSense is a distributed platform across many different Web sites where if you're a small publisher and you put AdSense on your Web site and someone clicks, you get part of the revenue and Google gets part of the revenue. Okay, that's AdSense. Well, that technology came from an L.A. company called Applied Semantics. Google acquired that and incorporated it. So, we have been very successful in the area of innovating business models.

What is happening in L.A. today that drives the startup community?

We finally have something that we didn't have in L.A. before which is second-time entrepreneurs. We have all the people who came out of eHarmony; who came from MySpace and Overture and PriceGrabber and Lastminute.com and Shopzilla and CitySearch and all these places. All of these people are now on their second, or some of them are already on their third business. And that level of innovation did not exist in L.A. 10 years ago.

We have a much lower churn rate of staff. I mean, Silicon Valley—by the way, I grew up in Northern California. I'm no hater of Northern California. I think it has tremendous advantages in some areas. But let's recognize the downside. The downside is, if you are Facebook or Google or Cisco or a company like that, you will hire anybody you want to hire, you will raise any amount of money you want to raise and you will go on and be one of the most successful companies in history, right?

But if you are not the lottery winner, and I'll call those lottery winners, if you're not the one company a year in the United States that makes a difference, but you can still build a company that sells for $500 million, $600 million, $700 million or, as in the case of Overture, $2 billion, you do not have the same challenges you have in Silicon Valley. You don't have the same levels of fast turnover as a starting point, right? Because it's just not that hyper-competitive, I'm-hiring-all-your-staff, because-I'm-Google environment.

How does Hollywood play into the types of companies that get started?

Well, let's pick some examples of what's working and what's not yet proven, okay. What's working that's based in L.A.: Hulu is based in L.A. Forty-five million monthly unique viewers. It's the number one place now that people go for professional content on the Internet. By the way, Hulu for me is a perfect example to highlight the differences between Northern California and Southern California.

Northern California will fund YouTube which reportedly last year lost $500 million. But in the end, you know, YouTube may be the most successful video site ever created. But Silicon Valley is willing to fund losses like that, whereas in L.A., we're focusing on Hulu, which is a very successful enterprise today.

There have been a number of next generation digital studios. One of them is EQAL, funded by Ron Conway [managing partner at Angel Investors] and several other investors, and they're trying to build a next generation digital studio and distribution. There's another company called DECA.tv, also trying to be next generation studio.

I'll give you another example in the innovation and content space: JibJab. So JibJab is based in L.A. and it took a little bit of time to figure out the monetization model, but they're absolutely killing it on numbers now that they found their model.

So, pushing the boundaries of what we consume and how we consume content, I think a lot of that will come from L.A. and I think there's a lot of money in that.

Are there particular types of startups that will fare better there?

There are 16 million people in L.A., it's the second largest DMA. It's going to produce all sorts of companies. What I think is less likely to happen in L.A. is to put $50 million dollars or $20 million in an unproven business and say, you know, here are three scientists, go out and try to create the next Facebook or Twitter or Google or whatever. I think it will be a lot more focused on early stage monetization and prove that you have a real business. That's what I think the difference is.

But in terms of sector focus, obviously there's some strength here. As I said, you've got the studios and content and video and I think a lot of that can and will come from here, but aside from that and aside from the kind of lead-gen type businesses, I think it will produce businesses all across the spectrum.

Is there enough native capital in L.A.?

Yeah. There are a number of venture capital firms in Southern California. They happen not to be the largest, but there are many out there. It's an hour flight from Silicon Valley. So, no big surprise, a lot of the Silicon Valley guys fly down here and spend time here and fund deals here. So yeah, there's a lot of capital that focuses on Southern California, but it's not Sand Hill Road. You don't have the same level of money.

What about engineering talent in the area?

Oh, there's a huge amount of engineering talent. Now, I'm not going to exaggerate. If you want to ramp up a business and eventually hire 500 or a thousand engineers, you're going to struggle in L.A. It's such a unique thing for Silicon Valley to have so many talented engineers all in one location because it's like trying to go to Northern California and find a film producer, right?

So I think scaling to your first 100, 150, 200 is very possible in L.A.. If you got the 500 or 1,000 or 1500 developers—by that point by the way, you're a massive company—it maybe harder to pull that off in L.A..

Does L.A. breed or attract entrepreneurs?

Take the former CIO of Google, a guy named Douglas Merrill. When he [thought] about what he wants to do next, he didn't do it Silicon Valley, he did it in L.A. So he's working on his next business here.

I mean look, honestly, I'm not trying to rub it in, but I'm on the 16th floor of the Fox Building staring at the ocean right now with no clouds in the sky. It's probably 75 degrees out. L.A. for quality of life is a phenomenal place. And so, it definitely will attract people. I think in the past, it struggled because people said, "If I go to L.A. will I really be able to raise money? Will I really be able to hire staff? Will I really get noticed?"

And I think these days—okay, it's not the same as Silicon Valley, you know, we're not necessarily getting everyone from all over the world thinking this is the first place to come. But I think more experienced people who have made a little bit of money and [who are] thinking about their next business it's, you know, I think a lot of them are here.

What is happening in the entrepreneurial ecosystem there that makes it sustainable?

To have a sustainable entrepreneurial community, you need the following things, which are kind of obvious. Number one, you need venture capital. It could be stronger in L.A. I'm not going to lie. It could be stronger.

Number two, you need repeat entrepreneurs. As I said, ten years ago we didn't have that. Maybe even five or seven or eight years ago we didn't have that. We have that now.

You need access to world class research. We have Caltech. I mean, Caltech is the MIT of the West Coast, right? We have Caltech, we have the universities, we have staff and talent. We have begun, as a community, to organize ourselves. I'm not sure if I told you or if you heard about it, I formed a community a year ago called Launchpad. I took 13 venture capital firms, I took 13 startup CEOs and I took a group of second-time entrepreneurs and we have regular sessions where we sit down and we mentor them, we coach them, we help them with introductions, we help them with the capital-raising process. And what it ends up doing is giving these talented young entrepreneurs more visibility in the community. And, you know, already one of them has been acquired by one of the 13, something like nine of them have already been funded and they've been able to get the next round.

We have more to gain by working together to see the community's entrepreneurs stay in L.A. because the number one risk, the mantra—and you probably have heard this for every city that you go to—the mantra of Silicon Valley VCs is, "Hey, we'll write you a $2 million check as long as you move to the Bay Area."

And Launchpad L.A. and another initiatives like it, just like TechStars in Boulder, are an initiative to make people feel like they can be part of a community and stay here.

The difference between me and TechStars Boulder is, I don't need to attract people to come here in the first place. I don't need to get a guy from Alabama to move here. I just need to be able to say in this town of 16 million people, "How do we identify the most promising young entrepreneurs so that we can lift them up and helped them succeed?"

Is there a particular profile of an L.A. entrepreneur that might be different from, say, a Silicon Valley entrepreneur or New York entrepreneur?

I think if I compare us to Silicon Valley, I would say slightly less geeky. And that, by the way, that's a positive and a negative. I would say [we are] way more focused on how they're going to make money. There's a slightly better business acumen than I think you find in Silicon Valley.

For more from this series:

  • Why you Should Start a Company in...Austin
  • Why you Should Start a Company in...New York
  • Why you Should Start a Company in...Boulder
  • Why you Should Start a Company in...Chicago
  • Why you Should Start a Company in...Boston

Image: http://www.flickr.com/photos/84263554@N00/ / CC BY 2.0

 

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2 Comments

  • Antone Johnson

    Great interview. Mark is a legendary figure in the Southern California tech entrepreneurship community and is widely respected for his mentorship of others.

    To underscore the point about entrepreneurs coming out of LA-based companies, there is a growing diaspora of talented former MySpace/Intermix executives who have gone on to found or build other companies all over the southland: Richard Rosenblatt (Demand Media), Brett Brewer (AdKnowledge), Josh Berman and Colin Digiaro (Slingshot Labs), Jason Feffer (SodaHead), Adam Goldenberg and Don Ressler (Intelligent Beauty), Amit Kapur (Gravity), and so forth. This is a whole new "generation 2.0" of Internet entrepreneurs following up on the successes of the first generation (Overture, etc.). It will be exciting to see what they can accomplish, but I think it's challenging to get the same level of exposure in tech business media as Bay Area startups -- although sites like Lalawag and TrendSlate are trying to change that.

  • bill right

    L.A. has an excellent talent pool and it costs less to live in L.A. then in Silicon Valley.

    A stable work force especially for those with children means alot. Likely if you look at places like New York one would also be able to find examples of starts ups also doing well.

    L.A. because of the smog and traffic is often under rated for quality of life. Staying in shape and doing one's 30 day shred in L.A. is equally convenient as in Silicon Valley.