Digitizing the Bottom Line

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For Jack Sheng and his partners at El Monte-based Eforcity Corp., the twin blows of the dot-com crash of 2000 and the 9/11 terrorist attacks almost spelled the end for the Internet retailer of cell phone accessories.


But Sheng and his partners high school buddies who launched their company with high hopes in 1999 decided to tough it out. The company eked out revenues and trimmed costs where it could, putting any extra money into beefed-up Web-based technology and an expanded product line.


Then, finally, sales began to accelerate amid a renewed interest among consumers and investors in Internet companies the so-called Web 2.0 resurgence.


“Our investment in technology paid off big time,” said Sheng. “Starting about four years ago, our growth just took off as the Web 2.0 wave of companies drove demand for our products and we were able to use the Web to target specific customers.”


Eforcity’s cumulative growth hit 108 percent from 2004 through 2006, landing the company on the No. 37 spot this year on the Business Journal’s list of fastest growing private companies. It’s also among the 39 companies that saw their three-year average growth rates exceed 100 percent, a rate that only about half as many companies achieved in previous years.


This supercharging of growth coincides with second-generation Internet companies hitting their stride some five years after the collapse of the first dot-com bubble left the industry in tatters. These companies have expanded just as rapidly as their predecessors did, but this time, many of them are actually making money, not just burning through venture capital cash.


Combine that with L.A.’s emergence as a center for the marriage of creative content and the Internet and the past few years have been heady times for locally based Web and technology entrepreneurs.


“The convergence of telecommunications, the Web and the entertainment content that was talked about 10 years ago is finally coming to fruition and it’s driving a whole new generation of companies,” said Kris Kaufmann, a technology partner with Deloitte & Touche LLP who leads that firm’s annual Technology Fast 50 survey.



Customer driven

Of course, not all the companies on the Business Journal’s fastest growing list are Internet- or technology-related. There are a fair number of health care companies, and real estate and construction-related businesses as well as trade and logistics firms. But of the 39 companies with cumulative growth rates topping 100 percent between 2004 and 2006, 12 are Web-based or computer technology-related.


Consider No. 10, Woodland Hills-based NxTV Inc., which provides Internet protocol video-on-demand, and interactive digital in-room entertainment for the hospitality industry. The company was founded during the original Internet boom, did well at first, then went through a lean period after the dot-com crash. Then, about four years ago, it took off again.


“Back in 1998 and 1999, the goal was to spend as much money as possible to acquire as many customers as possible. It didn’t matter whether the company had a successful business model,” said NxTV founder and president Russell Reeder. “Now, it’s all about meeting the customer demand.”


What’s more, Reeder said, L.A. was a logical place to set up an Internet-related business. “Los Angeles is definitely the digital media hub, where technology, finance and the media all intersect. The content side being here and the deal-makers being here are what make the difference.”


Reeder and other industry executives cite several reasons why Web 2.0 companies are thriving and why L.A. has emerged as one of the leading hotbeds for these companies.


Most important, they say, is that the industry has matured enough that customer demand is driving the business.


Back in the late 1990s and into 2000, the Internet was still in its infancy. Many people were not yet online, and if they were, the download speeds were so slow there was little they could do. Also, with a handful of exceptions, most companies hadn’t figured out how to generate profits using advertising on Web sites. As a result, a lot of ideas for Internet-based businesses sprung up, but few were profitable. Essentially, they were ahead of their time.


But starting about five years ago, the technology and customer demand finally started catching up. “Now, the technology has matured more, the infrastructure is there, the bandwidth is there and, just as importantly, the American consumer of entertainment is moving online,” Kaufmann said.


The spread of adequate bandwidth has been crucial, allowing for the transmission of video and for a greater range of interactive options for consumers, said Aaron Broder, chief executive and co-founder of No. 18 Gorilla Nation, an online media advertising company.


This has greatly expanded the demand for Web retail transactions and opened up markets for advertisers. “People spend more time online and are more comfortable with spending money online,” Broder said.


Bandwidth has also been a big factor behind the growth at Chatsworth-based No. 19 PrintsMadeEasy.com, which allows customers to print business cards, envelopes, mailing labels and other products online. “The upload and download speeds are so fast now and people are also more secure in using credit cards online,” said Chief Executive Brian Whiteman.


What’s more, the local entrepreneurs now running Internet-related companies are much more customer-focused, letting consumers drive demand for their products or services instead of putting something out there and hoping customers take to it. Also helping fuel the boom have been readily available pools of entrepreneurs and creative talent.


“A number of people involved in the first-generation Internet boom got laid off when the bubble collapsed, then bided their time for a couple years in other industries before jumping back in to start new companies,” said Kevin Klowden, managing economist with the Milken Institute in Santa Monica. “Many of them were waiting around to have their ideas funded.”



Entertainment talent

That funding started arriving in late 2003 and into 2004 with a boom in private equity and a resurgence in venture capital.


With plenty of creative talent already here as part of the region’s entertainment industry, there has been a steady supply of people to assist these fledgling companies in developing content for the Web. “After the dot-com bust, many of these folks went over to the computer gaming industry, working for companies like Activision,” Klowden said.


Now, they can be found working at companies like No. 8 Design People Inc., a Marina del Rey company that designs, develops and licenses industry-specific Internet sites.


“There are a ton of Web designers and developers here that we have been able to draw upon,” said Chief Financial Officer Jon Krabbe. “It’s the Southern California equivalent of Silicon Valley.”


Another company benefiting from this talent and from the explosion in Web-based businesses is No. 23 Prelude Systems Inc., a Diamond Bar-based software development concern that helps put companies on the Internet. “As more and more companies do things over the Web, our business grows. They need services like ours,” said Kiran Babu Chandra, a principal with Prelude Systems.


All of these factors combined during the years 2004, 2005 and 2006 to produce rates of growth seldom equaled in recent L.A. business history. But there is considerable doubt that this stratospheric momentum can be maintained for long, especially in the face of a slowing economy and a credit crunch that threatens to choke off vital financing for many of these firms to expand or get bought out.


Yet, as is almost always the case in an economy as entrepreneurial as L.A.’s, a new crop of companies could be getting ready to challenge the Web 2.0 businesses for the rapid growth crown: green technology firms that have launched amid high oil prices, fears of global warming and other environmental concerns.


“It may take another year or two before these show up on the radar, but they are out there,” Kaufmann said.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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