When L.A. tech startups look around for funding and mentors, the message often has been: Go north to Silicon Valley.
But suddenly, several area entrepreneurs are starting programs to boost early stage companies and keep them here.
These programs, called accelerators, offer embryonic companies guidance and resources to help them through their first few crucial months. The concept, which has been practiced in other tech centers for the past few years, is new to Los Angeles but is launching en masse. There are at least seven accelerators now signing up participants or about to do so in the next few months – so many that some are wondering if the market is already saturated.
The goal is to help startups speed up growth during their earliest stage, a time when many companies often struggle, said Dan Dato, co-founder with Bruce Brown of Santa Monica accelerator upStart.LA, which began accepting applications over the summer for its first class of companies.
“That type of community and collaboration really helps an early stage company and entrepreneur as they try to tackle an extremely challenging process,” Dato said. “It creates the right dynamic that takes these teams of entrepreneurs and gets the results that we want, which is this acceleration of pace.”
The first class of upStart.LA will begin in January and end in April. It will give five to 10 startups access to $18,000 each, provided by the co-founders; office space in Santa Monica; and mentors and other resources such as legal services. In exchange, upStart.LA will take a 6 percent equity stake in each company. At the end of the session, the companies will pitch to investors.
Other accelerators that are accepting candidates include StartEngine in Westwood, and MuckerLab and Launchpad LA in Santa Monica.
Founder Institute, which has programs elsewhere, and K5, which will target all of Southern California, also plan to run programs in the area. Mike Jones, a Myspace veteran, has started a hybrid accelerator-investment company called Science in Santa Monica. (See sidebar.)
The accelerator is a twist on incubators, which became popular during the 1990s tech boom. Incubators such as Idealab, founded by Bill Gross in Pasadena in 1996, typically work with a company for several years until it becomes publicly traded or is acquired. At that point, the incubators get their payoff.
But accelerators mentor and provide resources to a company for a shorter, finite period of time, usually only during the earliest stage. Then the company moves out to operate on its own and the accelerator maintains equity in it.
Erik Rannala, co-founder of MuckerLab, which began accepting applications last month, said Los Angeles needs accelerators to provide funding and mentorship to early stage companies that might otherwise get overlooked.
“There’s a gap for startups at the earliest stages in terms of infrastructure and resources,” Rannala said. “New York has gotten a lot of attention for having a startup renaissance for the last few years. I think Los Angeles is poised for a similar phenomenon.”
‘Tiny investment fund’
Launchpad LA, which is accepting applications for its third class, started out as a networking group but has evolved into an accelerator. Its first two classes weren’t as structured as the next one will be, and the resources didn’t include any money or office space.
But earlier this month, Launchpad, which is run by L.A. entrepreneur Sam Teller, announced it will provide Santa Monica office space and $50,000 in funding to each accepted company.
Mark Suster, managing partner at Century City venture-capital firm GRP Partners who founded Launchpad, said the program evolved to fit the startups’ needs.
“It was clear that people wanted more engagement and more education,” he said. “They wanted a facility because they wanted more interaction and access to VCs and companies.”
Like many accelerators, Launchpad operates with money from venture capitalists and individual investors. Others, such as MuckerLab and upStart.LA, are self-funded.
Most programs provide seed money and services in exchange for an equity stake of around 6 percent in the startup.
Should one of those companies get acquired or go public in the future, that minority ownership would, theoretically, provide a return on investment and generate cash to help the accelerator continue running.
“We’re effectively investors,” said upStart.LA’s Dato. “In that respect, upStart.LA is structured similar to an investment fund. It’s a tiny investment fund.”
Accelerators have good reason to expect success from their companies, said Peter Friedman, publisher of the Innovation Investment Journal in Dunstable, England. By closely nurturing startups, accelerators can help their chance of success.
“Early stage investment, in order to reduce the failure rate, requires you to get very close to the company you’re investing in,” Friedman said.
Of the 23 companies that went through Launchpad’s earlier program, 19 have received additional funding and five have been acquired.
Of course, these programs do not guarantee success. The entrepreneur has to put in the time, said Abdul Khan, who participated in Launchpad LA’s first class with his startup iBeatYou, an online competition site.
“You really make what you want out of the program,” said Khan, who sold iBeatYou last year to Santa Monica video company OVGuide.
Y Combinator in Mountain View started the accelerator trend in 2005 when it began mentoring a class of startups. Since then, similar programs have appeared in tech communities such as New York; Seattle; and Boulder, Colo.
The founders of L.A.’s tech accelerators all cite a similar motive, helping provide more support for the local tech community to grow.
“Over the years I’ve seen companies pick up and leave from here because they felt they would have a better chance in Silicon Valley, and I found that frustrating,” said Howard Marks, a former Activision executive who helped found the StartEngine accelerator.
Each accelerator works differently. StartEngine, for example, plans to accept 30 companies, more than triple the normal number that its competitors service. On the mentoring side, Launchpad LA will have both local mentors and a revolving door of guest mentors from Silicon Valley, while MuckerLab boasts a large roster of L.A. entrepreneurs and tech insiders.
Launchpad’s Suster said that at first he worried Los Angeles would have too many accelerators. But Idealab’s Gross, who is also a Launchpad investor, convinced him otherwise.
“When I saw the sheer number of new accelerators coming into the market, I had my moment of doubt,” he said. “But Bill, the guy who created this whole industry, said to me, ‘We need more of this in L.A., not less of this.’ It’s all for the benefit of Los Angeles.”
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