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

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.