Marketcol/turner/26″/LK1st/mark2nd
Just a year ago, New York and Los Angeles were battling for bragging rights over which was the nation’s No. 2 new-media center after Silicon Valley.
Guess what? New York won.
At least, that is, in the interactive advertising business. The trade magazine Mediaweek published a list of the 50 biggest interactive ad agencies in the United States last week. New York and the Silicon Valley are home to most of the companies on the list. There was only one in Los Angeles and it was No. 49.
What happened? A year ago, L.A. was home to at least a dozen major players in the interactive ad business companies that develop promotional Web sites, come up with interactive ad strategies or create and buy advertisements that run on the Internet.
The answer is that most of them are still here, but they’re now satellite offices of much larger companies based elsewhere. And the reasons for that say a lot about not only L.A.’s new-media community, but the entire regional economy.
“This is just gold rush fever. The principals of these companies cash out and then they go do something else. It’s like, ‘I could be a millionaire at the age of 24!’ ” said Jeannine Parker, president of new-media consulting firm Magnitude Associates.
In 1997 and the first part of this year, L.A.’s fast-growing Web development firms were like shark bait. Names like BoxTop, W3-design and Digital Evolution disappeared during a feeding frenzy in which better-funded outfits based elsewhere such as Atlanta-based iXL Holdings and Santa Clara-based USWeb Corp. gobbled up the best of L.A.’s Internet companies.
Many of the acquirers were no bigger than the companies they purchased at the time they started their buying sprees. Which brings up an important question: Why weren’t any of the L.A. companies the acquirers rather than the acquired?
“It’s a huge problem for Los Angeles,” said Jim Dolbear, managing director of the Santa Monica-based Larkin Group. “Every time an industry gets successful, someone comes in and buys it.”
Dolbear, who works with the state-funded Goldstrike Project to help develop California’s new-media industry, believes the primary reason for the problem is access to capital.
“People come out here with not a lot of capital, and they didn’t go to the right schools, and they start businesses,” Dolbear said. “There’s very few people and companies and communities out here that understand how to set up a large organization that has access to the capital markets. They don’t look right, they don’t have the networks with the right people because they didn’t go to school with them.”
The one remaining L.A. company on Mediaweek’s list of interactive ad agencies might serve as an example.
Culver City-based Genex Interactive was founded in 1995 by Walter Schild and partner Scott Unger. Schild freely admits that he knows a lot more about technology than business, which is why he got together with Unger, who ran the business side of the company while Schild took over the technical side. Unger is no longer involved on a day-to-day basis, now working as a strategic consultant.
Schild funded the start-up with money he had made on the stock market, and later with credit cards. It became profitable by early 1996, and the company gradually began changing its business focus. Genex had started out simply by helping ad agencies with the technical side of getting their clients on the Web, but now it has evolved into a full-service agency that creates sites, develops Internet strategies and buys ads for clients on the Internet.
It has seen explosive growth over the past year. In 1997, it had billings of $4 million and about 25 employees. Schild declines to give current billings, but notes that the ratio usually works out to about $150,000 in billings for every employee, and the company now has 45 workers. That would mean about $6.7 million in billings (in the interactive ad agency business, billings and revenues are pretty close to the same thing).
Schild said he has gotten at least three firm offers from other companies seeking to buy him out, but he has refused each time.
“We just didn’t like the companies that were acquiring people,” he said. “What we saw with the victims of USWeb was, you had a lot of disparate companies that were just kind of stapled together. A lot of their clients were dissatisfied with that and came to us.”
But when asked whether he’d consider growing by acquiring other companies in his industry, Schild seems taken aback.
“With the amount of money being paid to buy these companies, I just don’t think that makes a lot of sense,” Schild said.
Many of L.A.’s tech entrepreneurs are a lot like Schild. They’re too busy simply making payroll to think about buying a competitor, they have few ambitions to be the Rupert Murdoch of new media, they don’t hang out at the Jonathan Club with venture capitalists, and they tend to be very young.
But their competitors in New York are hungry and they have buddies at Goldman Sachs.
“We’re not missing the business savvy in L.A. I think we’re missing the investment portion of the equation that other cities have,” said Parker.
Nonetheless, there is hope on the horizon. Dolbear says it takes 50 to 100 years to build a really effective financial infrastructure, and L.A. is still a very young economy. Things are quickly getting much better in terms of access to capital, he said.
Indeed, the venture capitalists obviously aren’t entirely ignoring local Internet start-ups. There’s a long list of VC firms planning to attend this year’s VentureNet conference on Nov. 4-5 in Costa Mesa, where young tech firms will be showing themselves off to financiers.
News Editor Dan Turner writes a weekly column on marketing for the Los Angeles Business Journal.
