Overview: Making It Click

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As the birthplace of the modern tech industry, Silicon Valley has cast a long shadow over L.A.

Finally, the Los Angeles tech market appears ready to take its place in the sun.

Last year, digital media, e-commerce and other Web 2.0 businesses received $248 million in venture funding easily more than twice as much as 2006, according to a survey by PriceWaterhouseCoopers.

That kind of growth placed Los Angeles third in the nation in Web 2.0 financing, outpacing New England, and trailing only New York and Silicon Valley. In 2006, Los Angeles was a distant fourth, bringing in $111 million.

All these deals reflect heady times in the local tech market, where money is flowing into fledgling startups everything from social networking sites and Internet TV platforms to search optimization technology, and new media companies relying on entertainment and other content.

And despite all the virtual technology, the deal-making takes real-life flesh and blood to carry out, which means individuals are making it happen in Los Angeles. So just who are they?

This year, the Business Journal’s Who’s Who in Banking and Finance package zeros in on major players in Web 2.0 financing. It’s a list of 22 venture capitalists, deep-pocketed angel investors, seasoned entrepreneurs, and a group of lawyers and other enablers who play crucial roles in connecting new ideas with money.

“An entrepreneurial culture is really starting to take hold here,” said Greg Martin, an active investor and partner at L.A.-based Redpoint Ventures, one of the first backers of MySpace. “Success breeds success, and there’s been a lot of that here among Web 2.0 companies.”

That’s almost an understatement.

Last year, 40 Web 2.0 financing deals took place in Los Angeles, four more than traditional tech powerhouse Boston.

The genesis of Los Angeles’ Web 2.0 renaissance began with high-profile acquisitions dating back to 2003 when Burbank-based search engine Overture sold to Yahoo for $1.6 billion.

The next year, Santa Monica-based Rent.com was acquired by eBay Inc. for $415 million. Then, in 2005, Experian Interactive scooped up Westwood-based PriceGrabber.com for $485 million and News Corp. made headlines buying MySpace for $580 million a seemingly high price at the time but now a veritable bargain.

A Web 2.0 startup begins with an innovative idea, a committed management team and a lucrative revenue model. Compared to other tech startups, like biotech or computer hardware companies, these Internet companies require little infrastructure, and seed money generally ranges between $3 million to $7 million.

It’s the kind of model that begat downtown’s Oversee.net, a search engine optimization company that started in a college dorm room, which generates $200 million in revenue.

Another example is Santa Monica-based DemandMedia, a high-tech new-media company. Headed by former MySpace Chairman Richard Rosenblatt, it’s pumped with $320 million in venture capital and has already made nearly 20 acquisitions.

Randy Churchill, an L.A.-based technology business development director for PricewaterhouseCoopers, said the numbers are growing because of the dynamics of Web 2.0 financing.

“We’re seeing an increasing number of smaller deals in Los Angeles because it’s much cheaper to start an Internet company than it used to be,” said Churchill, who conducts the accounting firm’s local Moneytree venture capital survey. “It’s really on the consumer side of the Internet that L.A. is building a critical mass.”

Gone are the days, for example, where investors spent well over a billion dollars to set up Internet grocers such as Webvan, which needed warehouses, a fleet of trucks, delivery men and other brick-and-mortar infrastructure.

That’s not to say investing in Web-based infrastructure isn’t happening, especially for the hardware that makes today’s networks and computers faster and more reliable. For example, when including venture funds for Internet infrastructure technology both hardware and software Boston surpasses Los Angeles by about $200 million.

In L.A. though, the Web 2.0 startups are focused on the consumer side of the Internet, along with others that are business-to-business focused. Proximity to Hollywood also sets the scene for burgeoning new-media businesses.

“A Web business is fundamentally a media business that requires creativity in content, capturing people’s attention and keeping them entertained,” Martin said. “That’s what Los Angeles is known for.”

The talent pool has always been here, but now Martin is witnessing this Web 2.0 boom lure people into actually leaving their media jobs and taking chances on Internet startups.

Ultimately, investors are looking for entrepreneurs with a track record of building businesses from scratch and enabling them to take off. Enough of them have demonstrated success in Los Angeles that venture capitalists and angel investors, long fixated on Silicon Valley, have begun shifting their gaze south.

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