If PayPal Inc.’s purchase of ecommerce software developer Honey Science Corp. is any indication, Los Angeles’ startup scene is reaching a new plateau.
The $4 billion deal announced in November was the largest acquisition of an L.A. tech company, and industry insiders say the momentum should continue in 2020 and beyond.
Indeed, Los Angeles is no longer regarded as just a satellite of Silicon Valley in the venture capital space. There’s been a proliferation of seed funds and accelerators in recent years and there’s even an incipient presence of later-stage funding.
“The headline is Southern California tech and innovation has been building momentum for the last two decades,” said Andy Wilson, executive director of the Alliance for Southern California Innovation, which promotes tech and life science startups in the area. “I’d like to think that we’re at an inflection point.”
In 2019, the L.A. area witnessed 661 deals worth about $8 billion through mid-December, making it the fifth-largest market in deal size and count behind San Francisco, New York, San Jose and Boston, according to Pitchbook Data Inc.
“The local pool of capital is definitely maturing and getting bigger,” says John Keatley, chief executive of Pasadena-based fintech company Scratch Financial Inc., which raised $65 million in debt and equity in a Series B round in October.
And then there are the L.A.-related exits: The Honey sale came on the heels of Amazon.com Inc.’s purchase of smart doorbell-maker Ring in 2018 for more than $1 billion, Unilever’s $1 billion acquisition of Dollar Shave Club in 2016 and Facebook Inc.’s $2 billion purchase of Oculus VR in 2014. As for going public, Beyond Meat Inc. did so with a $1.5 billion valuation in May, and there was Snap Inc.’s $19.7 billion IPO in 2017.
The growing VC activity is largely due to a burgeoning startup scene that spans many industries. Of course, L.A. has historically been the epicenter of media and entertainment, as well as having a decent presence in ecommerce and ad tech.
Sectors of innovation
While consumer content is still the city’s bread and butter, different parts of SoCal increasingly host other sectors of innovation. For instance, El Segundo is a venue for aerospace, while artificial intelligence and robotics happen in Pasadena. If you want medtech head to Irvine, while you can find a chunk of consumer media in Santa Monica.
That “interindustry dynamism” can give L.A. an advantage over the Bay Area, which is so heavily focused on tech, says Brendan Wallace, co-founder and managing partner of venture capital firm Fifth Wall Ventures, which focuses on bringing tech to yet another industry — real estate.
“What you see in L.A. is the application of technology to real-world industries and problems,” Wallace says. “I think San Francisco is a little out of touch with some of the opportunities that exist in other spaces.”
L.A.-based venture capital firms also invest in a wide array of industries and will likely continue doing so, says Mike Jones, chief executive of Science Inc., a Santa Monica-based, early stage venture capital fund.
“We can expect L.A. VCs to invest in far-reaching trends like take-out food, nutrition and health, business casual, indoor-outdoor living and modular housing, in addition to the cultural trends created by media and entertainment,” Jones says.
It has helped that the largest tech companies in the world decided to expand their presence in the L.A. area, inducing a trickle-
down effect, including increasing the local bank of tech talent.
Apple Inc., for instance, is expected to hire as many as 1,000 or more employees in Culver City alone by 2022, the same year Google plans to open a massive office space at the former Westside Pavilion. The FAANGs can serve as incubators as some of their employees tend to leave to launch companies of their own.
The proximity to Silicon Valley also aids SoCal, as large VCs up north have financed many L.A. startups. “They’re definitely jumping on airplanes a lot to come down here,” says Keatley of Scratch Financial, better known as Scratchpay, which provides financing for veterinary care. “Whether we have the same amount of homegrown VC in L.A. or not, there is a lot of interest in the area and a lot of deals being done.”
However, as Scratchpay exemplified in its most recent funding round, L.A. startups often look beyond SoCal for later-stage financing: leading the round were a New York-based fund and an Atlanta-based VC firm.
For Los Angeles to become a global player in venture capital, its next frontier will have to be the formation of more large institutional funds that can provide mid- to late-stage capital. That takes time. “That’s been a choke point,” Wilson said. “We’re growing our own, but it takes a while to get from elementary school to high school to college.”
As a result, a sizeable chunk of venture capital funding for Southern California startups — two-thirds of it, according to Wilson — is imported from elsewhere, predominantly Silicon Valley.
More local funding would facilitate financing for startups, as they would be able to build relationships with potential funders. That, in turn, would help venture firms feel more confident about investing. The shortage of larger capital has also encouraged startups to sell while they’re small still.
“That has prevented the ecosystem from blossoming,” Wilson says. “You need these large exits to create ripples through the ecosystem.”
Because it’s just a 45-minute flight between San Jose and Los Angeles, many Bay Area funders haven’t needed to open L.A. offices. As a result, they don’t tend to build deep relationships with local companies.
Still, some local VC firms have broken the later-stage threshold. Take Fifth Wall, which closed a $503 million fund in July, making it the largest active venture fund in the city, with $1 billion under management.
“In some ways, our story as a VC fund is very apropos to what makes L.A. unique,” says Wallace, pointing out that his firm has raised its funds in a short time frame, having been founded in 2016. “What enabled Fifth Wall to grow to $1 billion is that we spotted this collision between real estate and tech.”
That, Wallace says, is happening in many industries in the city. And there are more L.A. funds in the pipeline, too.
“In last four months,” he says, “I’ve had conversations with entrepreneurs who are talking about at least eight funds.”