It would be hard to throw a rock down Avenue of the Stars without hitting someone who manages a fund; after all, Century City has become one of L.A.’s leading financial centers. However, venture capital firm Upfront Ventures is getting ready to leave its 16th-floor suite there to move into a former phone company switching station on a Santa Monica side street.
Why is Upfront heading west? That’s where the entrepreneurs are.
“That’s all we care about,” said Yves Sisteron, co-founder and managing partner of Upfront, “finding new entrepreneurs.”
The firm’s new Santa Monica office space is designed to draw them in. The creative office has indoor and outdoor event space, and Sisteron wants it to become a “clubhouse” for entrepreneurs: He believes there’s no better way to find the next great business founders than to give them space to work down the hall so you can bump into them on breaks.
Upfront, which changed its name from GRP Partners last year, is No. 1 on the Business Journal’s list of largest venture capital firms in Los Angeles, based on assets under management, having managed more than $1 billion over four funds. It is about twice the size of the second largest, Steamboat Ventures in Burbank. Since it was founded in 1996, Upfront has invested in dozens of companies, 15 with market values exceeding $1 billion each. According to data provided by PricewaterhouseCoopers and the National Venture Capital Association in Arlington, Va., Upfront was the most active VC firm in the L.A.-area last year, buying into eight companies.
When being pitched, Sisteron and his partners often focus less on the business itself and more on the business founder. Sisteron said that way he doesn’t overthink the value of a company.
Ultimately, the firm sees every investment as a bet on an entrepreneur that will either pan out or not.
“If they succeed, we succeed,” said Sisteron. “If they don’t succeed, it doesn’t matter what value you paid, you lose the money just the same way.”
Upfront makes its money when it sells companies or they go public. Some of the firms it invests in, such as Santa Monica website personalization firm Gravity, recently sold to New York media giant AOL for $91 million, turn out to be very profitable. Big hits like that make up for the duds.
While Upfront has been in Los Angeles since Sisteron and Steven Dietz co-started the firm, the big change over the last few years is that more of its portfolio companies are here, too. Only 15 percent of Upfront’s 2000 fund was committed to L.A. businesses, but today, the firm invests two-thirds of its money in local companies. Sisteron said that’s primarily due to the city’s emergence as a launching pad for Internet businesses, such as Gravity and TrueCar, a Santa Monica automotive pricing portal, both Upfront portfolio companies.
“You have a much more active entrepreneur community in Los Angeles than it was even five years ago,” said Sisteron. “It’s become the most entrepreneurial area in the country.”
Even as Los Angeles has become a hot spot for startups, the venture capital firms that traditionally support them have yet to arrive in real numbers, which is why Silicon Valley funds still predominate in local deals. Santa Monica venture capital firm Rustic Canyon and Greycroft Partners, a VC shop with offices in Santa Monica and New York, work in the space, but more often than not, L.A. startups find themselves going upstate for funding.
“At our level, it’s not like we compete a lot with L.A.-based funds,” said Sisteron. “They’re not here.”
Benjamin Kuo, the founder and publisher of Socaltech.com, a website that covers the local tech industry, is also waiting for the L.A. venture scene to catch up.
“There’s always been more entrepreneurs than capital here,” said Kuo. “Some quarters, you’ll see 90 percent of the deals are done by Silicon Valley or East Coast VCs instead of local VCs. The proportion of outside deals is surprising.”
The lack of local funders has produced discount shopping for out-of-town venture firms.
“It’s like value investing for Silicon Valley VCs here,” said Kuo. “There are a lot of good companies but not as much competition to put money into them.”
As for the clubhouse aspect, Kuo mentioned that law firms such as Cooley and Stubbs Alderton & Markiles have set up similar arrangements at their Santa Monica offices, but it has been years since a venture fund did it.
“It has been done before by a VC firm, but it’s been a while,” said Kuo.
Upfront’s new office, a 12,000-square-foot converted Verizon switching station at Seventh Street and Arizona Boulevard that the firm plans to move into by late summer, was designed to be its own mini-ecosystem. The building has both indoor and outdoor space, which Sisteron envisions being used to host events such as breakfasts and cocktail parties where local entrepreneurs can mingle and won’t feel out of place in a T-shirt and jeans, unlike in a Century City boardroom.
The office will also have desks where invited entrepreneurs can work on projects and take advantage of Upfront’s network of professionals. The goal is to create a place where entrepreneurs can find everything they need, from engineers to marketing people to investors, under one roof – and provide more deals for the company.
“We’re building entire databases of L.A.-based potential employees in various sectors,” said Sisteron. “We’re going to track those people. If we think we like someone and it’s a little early, maybe we give them a little bit of seed money for a seat at the table and grow with them. I see the way he thinks, the way he works, the way he hires people. All of a sudden, now he needs a couple million dollars and I’m there.”
Upfront’s new office will function much like business incubators and accelerators, which also provide support to local entrepreneurs. However, while incubators often connect business founders to outside capital, at the Seventh Street space, a Series A round might be a door knock away.
Because it invests in entrepreneurs, Upfront doesn’t mind if they pivot away from an initial idea if something potentially more exciting emerges. Sisteron cited the origin of San Francisco social networking giant Twitter Inc., which started out as an offshoot of a podcasting company.
“If I still think he’s a great entrepreneur, why would I fight that?” he said.
Brian Ree, chief executive of downtown L.A. fast-fashion company DailyLook, can attest to that flexibility. Upfront invested in his company and he has found the firm and Sisteron in particular very founder friendly, letting entrepreneurs do their thing without micromanaging every decision.
“He understands that all businesses evolve and change,” said Ree.
Sisteron mentioned one entrepreneur Upfront had backed whose first company wasn’t especially memorable, but whose second is changing the way people date online.
“Sean Rad created a business with us called Adly,” said Sisteron. “That did OK, but nothing to write home about. Then he went on to create Tinder. Tells you everything.”
For reprint and licensing requests for this article, CLICK HERE.