Kotkin/10-26/mark1st/LK2nd

Can L.A. See Its Way out of the Digital Desert?

Steve Koltai has the ethnicity right, but he’s unlikely to be the Moses who can lead Los Angeles out of the digital desert. After all, Koltai’s fledgling business, Cyberstudios, lacks the big-name capital or media attention that follows other Internet firms, like New York’s ultra-hyped N2K, which has a 10-K that looks like one of Freddy Krueger’s victims.

Yet Koltai represents precisely the kind of spirit, and company, that Southern California needs, if it is to win a reputation as one of the hot spots on the digital map. “The Internet is a consumer market and Los Angeles is kind of the king of consumer marketing in Hollywood we are used to selling to everyone,” notes Koltai, who employs 27 workers. “This is the best place to do this kind of thing in America.”

The son of Hungarian survivors of the Holocaust, Koltai brings to the Internet the kind of marketing sechel (Yiddish for “street smarts”) that has long characterized this town. Through a series of successful sites starting with Wedding.411 and the new BarMitzvah.411 he has found a way to link the power of Web commerce to consumers who need to access information on a timely basis concerning giving parties, maintaining guest lists, and buying goods and services.

Koltai also brings to the picture one of L.A.’s biggest assets close ties to the world of Hollywood. A former executive vice-president of Warner Bros., Koltai has a showman’s flair and was largely responsible for developing not only the studio’s on-line business but the successful Warner Bros. retail stores. He has transferred those skills and contacts to the Internet, attracting such investors such as Goldman Sach’s Joe Wender and Tom Whitehead, former chairman of Hughes’ satellite operations.

Yet even for someone like Koltai, raising capital and visibility has not been easy. Los Angeles may have the nation’s first or second largest collection of Internet and multimedia firms according to surveys from McKinsey and the Carronade Group but as far as most venture firms and high-tech journalists are concerned, it might as well be Barstow.

This is even true of large Los Angeles capital groups, who, for the most part, prefer to swim with the sharks in Northern California. Only 13 percent of the venture funds raised in Southern California, according to one recent study, remains here. “I had one of those guys tell me, ‘Why should I invest in an Internet company in Los Angeles?'” Koltai recalls at his Culver City offices. “I am only going to invest in companies in the Silicon Valley.”

This young venture capitalist, who has since transferred to the Bay Area, reflects a widespread prejudice against Southern California that has built up over the past decade. In the 1980s, veteran venture capitalists such as Don Valentine a tough-minded investor with extensive operational experience had no problems putting money into L.A.-based companies, including firms such as Tandon. But the new breed, such as Mike Moritz, a much-quoted Sequoia Capital partner specializing on the Internet, considers a firm’s very locale in Southern California as itself “pejorative.”

As a result, Southern California’s multimedia and Internet-related industries have been forced to rely on bootstrap financing, sometimes with individual angel investors. The region has had more than its share of multimedia successes Knowledge Adventure, Davidson, GeoCities, Activision but these have grown largely without massive venture investments. Venture capital in Los Angeles even ranks below such relatively weak technology regions as New York.

Lacking the proper financial backing, many of these firms have tended to be gobbled up by other, better-capitalized institutions. This year’s acquisitions, for example, of promising Web-developers W-3 and Digital Planet by larger firms represents just one element in this trend, as does the swallowing of Knowledge Adventure and Davidson by the ubiquitous, and now troubled, conglomerate CUC.

The relative inability of L.A.-based firms to grow beyond a certain size, as well as the lack of large-scale venture funding, has also hurt the region’s national and international stature as a high-tech center. Although the most recent numbers from Wharton Econometrics show that Los Angeles ranks 15th out of 100 in terms of percentage of high-tech employment and first in absolute numbers, the national high-tech world has largely ignored the region.

In comparison, other areas, not only Silicon Valley, but also New York, which ranks 80th on the Wharton list, have received reams of press for emerging high-tech and multimedia firms. The New York Internet/multimedia economy, perhaps half or one-third the size of L.A.’s, has been blessed by fawning local coverage, which in Manhattan also means national as well, with publications such as Business Week and The Wall Street Journal providing intensive coverage of “Silicon Alley” companies.

But as in the case of the venture capital dearth, the problem lies not only in others, but with our own media. In the early days of multimedia, when establishing a position was critical, the local L.A. media were slow to cover Southern California’s emerging Internet economy. This seems to changing somewhat, and even some national publications, including The New York Times and Time magazine, have seen fit to bring technology-oriented reporters into this region.

Even more important, there are also some stirrings in the venture community, most particularly through Knowledge Adventure founder Bill Gross’s Idealab consortium which, among other things, seeded both eToys and City Search.

It is too early to declare that Southern California is about to make it out of the digital desert. But if more firms such as Cyberstudios begin hitting it big, conditions may be right to find a Charlton Heston character capable of leading the region into high-tech’s Promised Land.

Joel Kotkin is a senior fellow at the Pepperdine Institute for Public Policy and a research fellow at the Reason Public Policy Institute.