When Alon Goren went looking for seed funding for his Santa Monica crowdfunding startup, Invested.in, he hoped to get a half-million dollars. But he found more interest from investors than he expected and ended up raising $830,000.

Invested.in is one of the many early stage companies benefiting from an L.A. technology community bursting with seed funding. In fact, Los Angeles has attracted several new seed funds.

But companies that are a little further along than Invested.in and are looking for multimillion-dollar funding rounds might not be so lucky.

Los Angeles is home to only a handful of established investors able to make bigger early stage investments and lead what are called series A and B investing rounds. Many startups are getting seed funding, but it’s generally believed that there’s not enough local venture capital to push those companies along as they mature.

One of the venture capital firms trying to fill that gap, Greycroft Partners in Santa Monica, is fielding more requests than ever from L.A. companies looking to raise money, said Dana Settle, a partner at the firm. Greycroft, which has made about a quarter of its investments in Los Angeles, just raised $175 million for its third fund.

“The growth of accelerators and incubators (to boost very young tech companies in Los Angeles) has not been matched with that growth in series A and series B funds,” Settle said. “We do feel like there’s a tremendous opportunity here.”

Greycroft, which opened in 2006 and also has an office in New York, invests up to $5 million in a new portfolio company and focuses its L.A. investments on digital media and e-commerce companies.

The region’s other larger VCs include Rustic Canyon Partners in Santa Monica, which invests up to $10 million in series A and series B rounds, and Century City’s GRP Partners, which is in the process of raising its fourth fund to continue investing in series A, B and later rounds.

These firms are active in Los Angeles and participate in many of the area’s largest investments. But there still isn’t enough local capital available to meet the future needs of the growing number of seed-funded companies.

“Certainly the majority of companies that raise seed-stage dollars will not raise significant series A,” said Nate Redmond, managing partner of Rustic Canyon.

Fresh funds

An entrepreneur just starting off often raises money from family members, friends, angel investors and seed funds. That funding might amount to several hundred thousand dollars. As the company gets footing and shows promise, it might attract institutional investor financing. Known as the series A round, that typically ranges from $2 million to $10 million. The money is meant to last six months to two years as the young company develops products, builds a staff and forms an operational business. If the company grows, follow-on rounds are known as series B, C and so on.

The disparity between seed and series A funding, known as the funding gap, is a problem that many technology communities are facing. It’s widely believed that a series A crunch will hit companies in Silicon Valley in the coming months due to an increase in startups and a decline in large investments.

In Los Angeles, the pickup in startup activity is due, in part, to accelerator and incubator programs that have opened up over the last year. They are designed to help companies through their challenging early months.

Seed funds are moving to the area to catch the wave of young entrepreneurs graduating from accelerators and hungry for cash.

Karlin Ventures opened in Brentwood during the summer to invest in early stage technology companies. The venture capital fund is backed by the private investment firm of billionaire Gary Michelson, who ranked No. 28 on the Business Journal’s list of Wealthiest Angelenos.

Tianxiang Zhuo, Karlin Ventures’ managing partner, said he saw opportunity in Los Angeles because the market isn’t as saturated as it is in Silicon Valley.

“We really see the market at a stage where it’s about to see a lot of exponential growth,” he said. “I wanted to be part of a new market and something that was growing quickly.”

Karlin was part of Invested.in’s oversubscribed seed round. The firm plans to invest primarily in seed rounds and co-lead some series A rounds. It will contribute to series B rounds for companies already in its portfolio.

Other funds expected to open in Los Angeles include Lowercase Stampede, founded by Silicon Valley angel investor Chris Sacca, which will invest in companies at the intersection of technology and new media, and DominateFund, founded by former tech journalist Ben Parr, which plans to help Hollywood types invest in technology companies.

Andy Wilson, former managing director of now-defunct investor Momentum Venture Management, said it’s a positive sign that Los Angeles is attracting funds when other tech communities, including Silicon Valley, are experiencing a shortage of new investors.

But these funds are adding to an already robust seed funding community – with established investors such as Siemer Ventures and CrossCut Ventures in Santa Monica – when the real gap lies in later-stage funding for startups.

“The scale of these funds is probably in most cases not sufficiently large enough to deal with where the bigger problem is going to be,” said Wilson, who now runs Pasadena startup Rexter. “In many ways, in the long run, they could exacerbate the problem.”

Collaborative community

Entrepreneurs and investors remain optimistic about the fundraising prospects for young companies despite concern about the lack of series A funding.

It’s not uncommon for L.A. companies to look to Silicon Valley or other markets to make up for the dearth of L.A. investments. This year, less than 25 of the nearly 200 investors in the Southern California market were local, according to data from SoCalTech, a blog that covers the local industry.

When Aaron Hirschhorn was raising series A funding for his Santa Monica startup, DogVacay – a marketplace that helps dog owners find pet sitters to watch Fido while they are traveling – he looked at investors in Los Angeles and Silicon Valley. Ultimately, Menlo Park VC Benchmark Capital led the $6 million round last month, with some of DogVacay’s existing L.A. seed investors also contributing.

Hirschhorn said the difference between the L.A. and Silicon Valley fund ecosystems was noticeable.

“There is a lot more deal flow up north,” he said. “There’s room for more series A or series B firms here. That hole will be filled by the firms in the Bay Area if there’s not more growth here.”

There’s always been a cyclical nature to the startup environment, with the best companies raising money and rising to the top while other less successful companies get left behind.

Karlin’s Zhuo said the environment in Los Angeles is more collaborative than cutthroat.

“Everyone has a vested interest in making L.A. succeed,” he said. “Companies refer each other to investors, and even the investors share deals all the time.”

While many other technology hubs are struggling with a decline in venture capital funding, investments in Los Angeles are on the rise due to the growing startup sector. Last quarter, 48 L.A. companies, most of them technology firms, raised money, up 4 percent from the same period last year, according to a report by PricewaterhouseCoopers and the National Venture Capital Association. The total amount of investments was up 9 percent to $324 million.

But L.A. VCs said the community needs to build up a better funding network so entrepreneurs don’t have to look elsewhere for early stage funding.

Young companies often benefit from hands-on attention from their early investors, something that is difficult for an investor in Silicon Valley or out of state to provide.

“The challenge with not having as much local venture capital is really that these companies do need to have investors and board members that are spending time with them,” said Greycroft’s Settle. “I think it’s important that there’s a local base of capital.”

Instead of viewing the funding gap as a problem, Steven Dietz, founding partner of GRP Partners, said it should be considered as an opening for more funds to be established in Los Angeles.

“The problem isn’t that there’s too much seed,” Dietz said. “The opportunity for everybody is to see more capital at the series A. I’d be happy for more local companies to get funded. Ultimately, it would benefit everybody.”

For reprint and licensing requests for this article, CLICK HERE.