Never mind the departure of Corporate America from L.A. The real action continues to emanate from those legions of entrepreneurs who are making this town a national hothouse for startup companies.
The entrepreneurial spirit is not exactly a new calling for L.A. and much of Southern California. Actually, if not for the assorted “cowboys, swashbucklers and lunatics,” Southern California might have become a business wasteland, said Joel Kotkin, senior fellow with the Pepperdine University Institute for Public Policy.
What’s changed is the emphasis on the small- to mid-sized business and its overall importance to the local economy, a point that’s been underscored by the departure of big corporate names through acquisition or relocation.
“Los Angeles is going back to what it started out as,” Kotkin said. “It’s an outpost where pioneers and risk-takers go after their dreams.”
Los Angeles is more dependent than any other U.S. metro area on businesses with fewer than 100 employees, Kotkin said. And while Silicon Valley receives a great deal of attention for its small-business successes, L.A. is the most prolific breeding ground for startups.
There were 3,704 new businesses launched statewide between March 1994 and March 1995, according to the latest figures available from the U.S. Census Bureau, and 2,109 of those 57 percent were in Los Angeles County.
“In a county of 9 million, you’re going to have a lot more new businesses than other places, said Mark Dowling, vice president of the La Jolla Economic Research Institute in Claremont.
Moreover, there is also a huge underground economy flying below government radar.
“You can’t count everybody who is starting a business out of their home,” said William P. Gartner, professor of entrepreneurship at USC’s Marshall School of Business.
Gartner said entrepreneurship is on the upswing nationwide as the country goes through an “economic deconstruction,” or a decreased reliance on big business.
L.A. is a big part of that picture. But why?
Clearly, there is something to the stereotype that people here are more open to risk-taking and trying new ways of doing things than their more tradition-bound counterparts in other areas of the country.
“There’s less of a stigma for busines failure in Los Angeles than many other places,” said Jack Kyser, chief economist for the Economic Development Corp. of Los Angeles County. “In a lot of other cities, a business failure makes for good cocktail party chatter, but here it doesn’t matter.”
And it’s also true that the departure of big business has focused more attention on smaller businesses.
“The many corporations moving or downsizing have contributed to the entrepreneur base,” said Debra Esparza, director of USC’s Business Expansion Network, an entrepreneur training program that also provides management assistance to outside clients. “Aerospace went away and these people had to find new jobs. Many of them made their own jobs by starting a company using their technology backgrounds.”
In addition to having many years of experience, many of those laid-off workers had nest eggs to use for starting a business.
“I am noticing that the number of clients with higher levels of education has increased in recent years,” Esparza said. “Before a few years ago, there was a greater percentage of people with a high school education coming to us.”
Government-sponsored small-business support in Los Angeles, such as through the Valley Economic Development Center, also has contributed to a healthy small-business environment, she said. Other factors include Los Angeles’ abundance of business services, its ports and access to distribution networks.
Plus, there is sheer size. A small company can find happiness and relative anonymity in places like City of Industry or the San Gabriel Valley instead of having to be based downtown or on the Westside. Such flexibility affords greater opportunity than other cities.
Esparza and others also cite Los Angeles’ concentration of universities and colleges as another catalyst for its entrepreneurial might.
The area’s two most prominent universities USC and UCLA each have entrepreneurial programs, and there is a growing interest in startup enterprises as opposed to going straight into big business.
“Younger people I come across want less and less to work for big corporations,” said Ed Bagdasarian, managing director of investment banking firm Barrington Associates in Brentwood. “The attraction of rolling the dice with your own business and having that potential economic upside is drawing people.”
This draw is being strengthened somewhat by the recent proliferation of business incubators throughout Los Angeles. These are programs that nurture startup businesses through their first few years.
Some of these incubators are school-based such as USC’s Egg Company 2 or UCLA’s Venture Project. Others are government-sponsored, or private-sector ventures, or public-private ventures.
Out of 44 incubators statewide, Los Angeles County has about 11 and several more are planned.
While owners of L.A. companies are just as happy as those in other regions to get rich off their ventures, going public or otherwise cashing out is not as prevalent in L.A. as it is among entrepreneurs in the Silicon Valley, according to numerous business and academic observers.
“Los Angeles definitely has more of an emphasis on people starting a firm and staying with it and growing it,” said G. Bradford Jones, a general partner with Brentwood Venture Capital, which invests primarily in technology and health care businesses. “Silicon Valley has more of a culture of the ‘quick flip,’ or growing a company and getting rich by having it go public or taken over.”
Is that because Silicon Valley has a more developed investment banking/venture capital community than L.A., making “company flipping” easier there?
Gardner says no. “There is financial infrastructure here if people want it,” he said. “But there isn’t the pressure to do so here, and companies can really assess whether it is beneficial for them to go after public money.”
Another way in which L.A. entrepreneurs differ from those in many other areas is that they operate in relative obscurity.
The sheer size of the L.A. economy makes tracking small companies, even the fastest-growing ones, very difficult.
“A company like Activision (a Santa Monica-based computer game maker) would have much more attention in the Silicon Valley or New York,” Kotkin said. “The greater sentiment of small business people as folk heroes just hasn’t grown here like it has in other places.”
Even researchers at Inc. magazine conceded last year that many more L.A.-area companies may qualify for inclusion on its highly watched Inc. 500 list of the fastest-growing companies in America.
But getting those companies, especially the entertainment and high-tech companies, to participate in the annual survey has been hard.
An absence of hype doesn’t bother Philip Alford, chairman of Verix Software Inc., a tenant at USC’s incubator project Egg Company 2, which nurtures the growth of young multimedia companies.
“In Silicon Valley there’s more venture capital but there is so much competition there that it might be hard to get above the noise,” Alford said. “In Los Angeles it is easier to get noticed, and I do see more venture capital coming here. It’s a good place to be.”