Tech and Those Who Serve It Dominate the Fast Lane

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To get a handle on what kinds of companies are thriving in Los Angeles, look no further than Exact Staff Inc., a Woodland Hills employee placement firm.

With unemployment at its lowest level in a generation, company founder and Chief Executive Karenjo Goodwin and her crew use whatever means available to find needed workers in industries ranging from entertainment to law. Successfully placed applicants are asked if they have friends in similar situations, and Internet chat rooms are scoured at night to try and lure people to Los Angeles or just to develop networks so that the word gets out. It is anything but a 9-to-5 day.

“You have to be really creative,” she says. “You’d be amazed at what we do. It’s all about word of mouth.”

Creative or not, it works. Exact Staff is the 17th fastest growing private company in Los Angeles, based on revenue growth. The company’s revenues went from $1.9 million in 1997 to $5.5 million in 1999, a leap of 189 percent, and show little sign of slowing down. Driving that growth is Exact Staff’s almost symbiotic relationship with the fast-track technology sector.

“We wouldn’t be at this growth level without the dot-coms and tech companies,” Goodwin said. “When I opened this company, I thought Java script meant coffee, I didn’t know what (computer coding languages) C++ or HTML were. If I didn’t know the lingo (today), I wouldn’t survive.”

There’s no doubt that technology companies are more vital to the local economy than ever, as evidenced by the fact that 20 of the 100 companies on the fastest-growing list are from the tech sector. Together with business services, the two sectors account for almost one-third of the 100 companies, testament to the growing dependence on each other. After all, rapidly growing tech companies need the services of consultants, logistical solution providers and yes, temporary-staffing companies to keep their engines humming.

“Overall, (the list) clearly supports the fact that technology growth, especially among smaller firms, is growing in importance for the Los Angeles economy,” said Ross De Vol, director of regional studies at the Milken Institute. “Much of the growth in tech depends on many of these business services, which is contingent on growth of the high-tech companies.”

“Tech companies need those services,” said Lloyd Greif, president of L.A. investment bank Greif & Co. “The way they leverage their dollars, their (best use of) capital is to subcontract out the service end.”

As might be expected, there isn’t a single pure Internet company on the list, primarily because such companies either haven’t been around long enough to have a three-year track record of revenue, or they’ve already gone public.

Instead, the tech companies on the list are generally involved in either software development or in digital infrastructure building high-speed networks and data processing systems. Indeed, these are the companies increasingly getting financing from investors chastened by the plunge in Internet valuations.

Of course, it is true that two-thirds of the companies on the list are neither high-tech firms nor their consultants. Manufacturers account for 11 of the 100 companies, another 11 come from the real estate sector, and nine companies are wholesale/distributors. Another notable aspect of the list is that it does not contain a single aerospace-related company.

“It’s just a reflection overall of the changing structure of the L.A. economy,” De Vol said. “Manufacturing is still here to some extent, but the economy isn’t dependent on aerospace.”

What economists like De Vol continue to hammer home is that these changes have led to greater business diversity, which in turn makes Southern California more resistant to an economic downturn. The top 10 companies are a testament to the region’s diversity, with the finance, marketing, apparel, technology, business services and real estate sectors all represented. Like last year, the top spot is occupied by Platinum Equity, a company that acquires and often revitalizes tech businesses to be resold for large profits. Platinum’s revenue has grown from $55.2 million in 1997 to $792.1 million in 1999, as it gobbled up companies, an impressive growth rate of 1,335 percent (albeit down substantially from last year’s rate of 13,900 percent).

But L.A.’s fastest growers have other shared qualities, especially youth, since newer firms start with lower revenue bases, which magnifies success.

Seven of the top 10 and 18 of the top 25 companies are less than a decade old. The top quartile grew by an average rate of 354 percent over the past three years, up dramatically from last year’s rate of 117 percent. Even if Platinum Equity is removed from the calculations, the average revenue growth rate is still 313 percent, since the next five businesses all grew by more than 500 percent.

In addition to Platinum, four other companies from last year’s top 10 managed to stay in that distinguished crowd this year, including alarm services firm Security Finance Associates Inc., U.S. Marketing & Promotions (which was acquired this summer by Omnicom Group Inc.), e-business developer Guidance Solutions, and automotive software developer Market Scan Information Systems Inc.

As might be expected, a number of companies either dropped down several places on the list or bounced off it altogether.

“Oh well, one of those things,” said Mike Cavanaugh, president of 3 Point Digital, a Burbank-based digital solutions provider. Ranked No. 3 on last year’s list, with a three-year growth rate of 1,374 percent, 3 Point Digital fell to 12th place this year with a not-so-measly growth rate of 213 percent. “Sustaining 1,300 percent is a little hard,” he said.

Cavanaugh has experienced the ups and downs of how the Internet economy is changing local businesses. His own company thrived last year as his client list grew to include several large entertainment companies like Warner Bros., Sony Pictures Entertainment and Fox Entertainment, which used 3 Point’s technology for professional editing, special effects, animation and multimedia content creation.

Like many tech entrepreneurs, he had the option of pursuing venture capital, which would have enabled him to ramp-up his business but also would have forced him to cede some control of his company. He decided not to pursue such funding and watched as others got what he calls “sick money” to grow their businesses.

“We haven’t had to access capital yet; we’ve grown internally,” Cavanaugh said.

Not that everything is rosy. The Screen Actors Guild strike hurt his company this year, to the point that it is unlikely 3 Point Digital will be on next year’s list. But Cavanaugh is certain he’s doing business in the right city, even if there are some drawbacks.

“We’re close to the entertainment industry, and maybe Orange County has more big corporate customers, where L.A. is limited,” he said. “But rent in Burbank is 90 cents a square foot (per month) compared with $1.25 in Orange County or San Diego and $2 in Seattle. And downtown Oakland, which is a (cesspool), is $4.”

But there are other restrictions for up-and-coming businesses in Los Angeles, which hinder recruiters like Exact Staff in bringing talent here. Living expenses, poor transportation and a sub-par K-12 public education system continue to make it hard for cutting-edge companies to entice top talent.

“What I am concerned about is the phenomenally high cost of living,” said William B. Gartner, professor of entrepreneurship at USC. “To live a middle-class lifestyle here is hard. And the public education system is a mess. That has long-term implications. Capital is not the problem; it’s human capital. We have a shortage of that. We’re a net importer of human capital; we need to change that.”

But the diversity of the economy continues to open up opportunities for a variety of businesses to thrive. And as sure as it is that some of the companies on this year’s list will be gone next year, it is equally true that there will be new thriving companies that will take their place.

“If you’ve got a smart business in L.A., there’s always room for more,” Goodwin said. “There are so many opportunities.”

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