Hot as the L.A. tech scene is, it is operating at a simmer rather than a boil.
That’s one of the conclusions of the UCLA Anderson Forecast released last week, which reports, among other things, that housing costs and educational challenges are keeping the region from more robust growth.
Though Los Angeles has been called the country’s second-best tech region, the local information sector grew by 17 percent from 2005 to 2013, just cracking the top 10 fastest-growing counties nationwide, according to the forecast. The tech sector is dominated by very small firms – 70 percent employ four people or fewer – and the region’s $80,400 average tech sector salary ranked only 21st in the nation.
That disappointing performance might be in part due to housing prices, argued William Yu, a co-author of the forecast and an economist at the Anderson School of Management. Housing prices have outpaced income growth.
“In the coastal areas of Los Angeles, housing prices have increased faster than the pace of salaries because the housing supply is not very elastic: Developers cannot build in those areas,” he said. “Housing is limited in Santa Monica. This kind of supply constraint will definitely limit the growth of tech companies.”
Buck Jordan, managing partner at Santa Monica venture capital firm Canyon Creek Capital, sees similar problems with office rents.
“Once a company gets to a medium-size growth stage they can’t afford Santa Monica and they move to Culver City,” he said. “It’s sort of a life cycle of where the company ends up.”
Moreover, said Jordan, startups are facing financing constraints.
“Right now, there’s a huge oversupply of seed capital and an undersupply of Series A capital,” he said. “When an L.A. company grows to a certain point they can no longer be supported by the local ecosystem. In the short term, in the next two years, there’s a bit of a funding gap.”
That undersupply of Series A capital might explain why there are fewer midsize and large firms in Los Angeles and the difficulty the region has competing with the lavish recruiting programs of Silicon Valley giants up north.
“All of the best engineering graduates have offers and jobs from the Facebooks and Googles of the world,” said Jordan Metzner, chief executive and co-founder of on-demand laundry app Washio of Santa Monica. “What L.A. has really been lacking is a really big tech company that can retain engineers really early in their careers.”
That, however, could be changing. The volume of startups in Los Angeles is beginning to create its own gravitational pull.
“There’s a huge growth of early stage companies, so a lot of people are staying in Los Angeles,” said Jordan.
For reprint and licensing requests for this article, CLICK HERE.