Kotkin/aug23/mark1st/mike2nd

The tsunami of venture capital pouring into Los Angeles represents what could be a critical turning point for the region and in the evolution of the high-technology industry itself. After barely accounting for 15 percent of Southern California venture monies in 1993, Los Angeles has gobbled up more than half the total for the first half of 1999, according to the most recent PricewaterhouseCoopers report.

This is even more impressive considering that venture funding in the Southern California region has increased dramatically over that same period, from $191 million to more than $1.1 billion. Once a relative venture capital backwater, the Santa Barbara-to-San Diego high-tech megalopolis has now emerged as the third largest destination for venture money, right after the Bay Area and New England.

For all of Southern California, this is welcome news and a sign that, at long last, the venture capital "community," as this group of self-styled visionaries likes to call itself, has begun to set aside its long-term antipathy for the region, particularly Los Angeles. Not long ago, for example, one prominent venture capitalist, Mike Moritz of Sequoia Capital, told me that simply locating a company in Southern California was a "pejorative."

Fortunately, the success of the high-technology industry here ranging from Broadcom in Orange County to eToys, CitySearch, GeoCities and iMall has begun to dispel such prejudices. Although the national media continues largely to ignore Southern California's sprawling technopolis, which ranks somewhere between first and third in the country, the area has become too Godzilla-like to be ignored by the money changers.

Perhaps even more intriguing has been the shift of capital flows within the region. Until the last three or four years, venture capital here and elsewhere was dispensed predominately to the "nerdistans" high-tech regions like Irvine that are on the edge of the megapolitan sprawl. Yet as the digital economy has evolved, the tide is shifting close to the creative core of the region Los Angeles and its immediate environs.

In a sense, this reflects a shift in the paradigm from what may be called "hard" technology to "soft." As early as the 1970s, the development of science-based industries most provocatively described by sociologist Daniel Bell suggested the emergence of a high-tech society where information supplants energy and conventional manufacturing as the critical sources of wealth.

At first, the result of this shift seemed distinctly hostile to the very idea of traditional cities, which had been the locus of most pre-information-age industries. By contrast, science-based industry created a new paradigm in economic development, shifting emphasis from the traditional urban center's ports, railroads and large pools of manual labor to those places where concentrations of educated workers could be lured and harnessed. Anchored by complex organizations with vast research and development capabilities, these "nerdistans" included Raleigh-Durham, N.C., the Santa Clara Valley, Orange County, Massachusetts' Route 128 area and northeastern New Jersey.

Between 1974 and 1992, the share of computer-related employment in cities fell from over half to barely one third. Looking at these trends, some futurists, such as George Gilder, have boldly labeled cities as little more than "leftover baggage of the industrial era." He suggests that the process of "geographic arbitrage," in which people choose where they live and work, will be devastating to the "current configuration of cities."

But by the late 1970s, visionaries such as Alvin and Heidi Toffler offered a startlingly different analysis of post-industrial trends, which ultimately suggested a new role for creative centers such as Los Angeles. In "The Third Wave," the Tofflers identified technology and science, not as agents of standardization and corporate bureaucracy, but characterized by customized production, organizational flexibility and individualized production.

The Tofflers took the idea of "information age" beyond the realm of "hard" sciences and looked at what may be considered its "soft" face. Indeed, technology services, not manufacturing, now make up the majority of high-tech output; in Massachusetts, more than half of all high-tech workers have non-manufacturing jobs, up from only one-third a decade ago.

Unlike the "hard" side, with its rationalistic and quantifiable characteristics, the "soft" side includes such fundamentally subjective fields as entertainment, fashion, media and leisure industries. Although the traditional "hard" industries still constitute an integral part of the information-age economy, increasingly important are areas where the two converge.

"Knowledge value," a concept developed by Japanese economist Taichi Sakaiya, represents the most useful term to describe this convergence. Rather than simply a function of superior "high technology, economic growth would accrue to regions, industries or firms adept at incorporating cultural "knowledge, design distinctiveness and fashionability" into products or services, Sakiaya said.

This evolution of the "soft" side of the technological revolution is what accounts for the resurgence of technology in urban areas, not only for Los Angeles, but other cities notably New York, San Francisco, Seattle and Boston adept at exploiting such "knowledge value" industries.

The continuing appeal of cities to the young, educated, and adventuresome is arguably the most critical factor behind the concentration of creatively driven firms. Rather than locate predominately in the peripheral areas, large concentrations of these industries have focused in heavily urbanized areas such as West L.A./Santa Monica, lower Manhattan, Seattle and the South of Market section of San Francisco. These areas, along with the San Jose and Boston areas, also boast the largest number of Internet hosts.

Among these urban centers, Los Angeles has long possessed its own distinct advantages notably the already large presence of technology firms (a result of its role in the aerospace industry), large blocks of usable and relatively well-maintained industrial space, and the proximity to the Hollywood cultural industrial complex. Now that the "soft" paradigm has emerged, these essential strengths are finally being recognized, and it's about time.

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

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