Visitors to the launch party for Social Media Week Los Angeles at a private club in Santa Monica saw a strange sight this past September: Los Angeles Mayor Eric Garcetti energetically working the crowd. As a New Yorker used to the imperial bearing of outgoing Mayor Michael Bloomberg, it was a strange sight to see—a mayor glad-handing and schmoozing a social media conference like the head of a startup. But Garcetti's demeanor, combined with a suite of incentives Los Angeles offers small tech firms, adds up to an unambiguous message: Los Angeles wants startups.
Garcetti told Fast Company that "Los Angeles is the creative capital of the world and home to more than 2200 startups. Our diverse population, talent pool, great universities, Pacific Rim location, and innovative make L.A. the ideal city to foster new ideas and businesses." But in order to get those startups, the City of Angels has to tackle some challenges. For one, it has lots of talent, lots of startups, but not so much venture capital, according to the semi-annual Los Angeles Startup Ecosystem Report, published by incubator Be Great Partners with the assistance of Los Angeles's city government and provided in advance of publication to Fast Company. It paints a picture of a booming tech sector that, surprisingly, is fueled mainly by business products, mobile services, and biotech rather than entertainment. Compared to other prominent secondary startup hubs like Boston and Chicago, Los Angeles is lagging in attracting venture capitalists. Here's more
Compared to the geographically tidy Bay Area or New York, Los Angeles startups are decentralized. Be Great identified seven main hubs for the tech industry: "Silicon Beach," West Los Angeles, the South Bay, Orange County, Downtown Los Angeles, Pasadena, and Culver City. Silicon Beach—Santa Monica and environs—disproportionately dominates the local ecosystem with 35.9% of all L.A. startups headquartered there.
In practical terms, this means that Los Angeles has no tech hub, no center for meetings and run-ins that fuel innovation. In New York, a startup founder or marketer on the make can hang out at the Ace Hotel lobby or Tom and Jerry's to their heart's content and find people beneficial to their operation. San Francisco has The Grove and 21st Amendment, along with certain Palo Alto and Mountain View coffee shops. Instead, the Los Angeles tech sector is fragmented into a million locations—and there's no startup equivalent of the entertainment industry rubbernecking at the Standard Hotel.
One of the biggest takeaways from the Los Angeles startup report is how the city's tech sector has relatively little in common with Hollywood. Despite YouTube's and BuzzFeed's impressive Los Angeles headquarters, media isn't the driving engine of the L.A. tech world. Mobile services, and the sort of raw engineering talent favored by both Orange County defense contractors and the Jet Propulsion Lab have much more to do with the success of Los Angeles's tech sector.
What did skew the direction of Los Angeles's tech scene, however, was the year 2005. MySpace's acquisition, subsequent implosion, and rebirth as the more-scaled down Myspace left a lot of tech-savvy Angelenos with plenty of pocket money and plenty of free time. This combination, as was alluded to in a recent New York Times article, led to an explosion of smaller startups. Some of the startups operating in this post-MySpace environment have been very successful. Gradient X, a Santa Monica-based mobile ad firm, sold to Singapore-based Amobee just two months after launching out of beta. Snapchat turned their start as an app that many assumed was best for sexting into a bona fide messaging service that's often mentioned in the context of Facebook.
While Los Angeles has startups to spare, industry success stories, and plenty of raw talent, the region's tech scene is hampered by a lack of local venture capital. The entertainment industry is notoriously loathe to spend its money on the tech world (and, as we all remember, the corporate music industry reacted with excitement and goodwill towards fledgling tech projects like Napster and Bittorrent). But finding local investors and catching the eye of out-of-town firms remains Los Angeles's greatest problem. Like New York and Berlin, Los Angeles built a large tech community without a local feeder university like Stanford or MIT. But unlike those cities, Los Angeles doesn't have the local investors to nurture early-stage companies. And very few of these investors and funds are based where the startups are. While Santa Monica and West Los Angeles are home to the bulk of local startups, the largest single hub of tech investors is suburban Orange County. The next biggest hub is the well-heeled Los Angeles cluster of Beverly Hills, Century City, Westwood, and Brentwood; Santa Monica only has a modest 18% of the region's investors.
But there is good news. According to the study, the average investment in a startup by a Los Angeles-area V.C. or angel firm is about $4 million, with investment amounts ranging from $25,000 to $30 million.
One constant in both the message from the Be Great report and Garcetti's office is that they want tech talent to move to Los Angeles. The quality of life is constantly cited, as is the lower cost of business in relation to San Francisco or New York, and the quality of local tech talent. Los Angeles's city government has intermittently flirted with tax breaks and investment incentives for local startups that have been hampered by local politics. Meanwhile, local investors have attempted to encourage out-of-town startups to come to town.
But as that happens, Los Angeles's tech community has to deal with a challenge—convincing the considerable number of well-heeled locals with investment funds to spare to consider tech. While LA's tech scene might not be dominated by entertainment startups, they exist in a world where the entertainment dollar rules the local economy. Squaring that circle, in the same way that New York's tech community came to a détente with Wall Street, is the next challenge for the region.