The L.A. tech industry had a great run in 2015 and is set to keep that going this year.
Venture capital investment in Los Angeles County tech companies is estimated to reach a record $1.6 billion this year, according to CB Insights of New York.
But in 2016, they could face headwinds.
Controversies surrounding overvalued firms, such as blood-testing company Theranos Inc. of Palo Alto, have highlighted the dangers of investing based on untraditional business metrics, chilling enthusiasm for riskier startups. Plus, a slowdown in global economic growth and an expected increase in the Federal Reserve’s interest rate suggest a more difficult economic environment for businesses this year.
Venture capitalists and tech executives don’t expect another dot-com bubble implosion, but rather foresee a cooling off in tech funding and valuations.
We spoke with several L.A. executives and investors about tech industry issues to watch in 2016: Alex Lidow, chief executive of El Segundo semiconductor maker Efficient Power Conversion Corp.; TX Zhuo, managing partner of Santa Monica venture capital firm Karlin Ventures; and Richard Wolpert, chief executive of West L.A. technical support startup HelloTech.
Back to basics:
Increasingly, tech companies will have to justify their valuations based on traditional business metrics.
Lidow: “Companies looking for late-stage financing will see a greater emphasis on fundamentals such as revenue, margin and cash flow, and a lower emphasis on less tangible metrics, such as the size of an audience without strong monetization.”
Higher interest rates:
The Federal Reserve boosting its interest rate will have little direct effect on venture capital investments, but might impact the wider economy, including tech companies.
Zhuo: “The cost of doing business will go up, whether this takes the form of direct costs such as the interest rate on the working capital line or the indirect pass-through costs from business partners who now have higher costs as a result of the change.” Also, “it is probable that consumers will cut back on nonessential, discretionary spending, so startups need to focus on maintaining their share of their customer’s wallet.”
Less IPO enthusiasm:
Bigger private investments and a less hungry retail investor market will continue to dampen the fanfare surrounding initial public offerings.
Zhuo: “In the past, retail investors could only get access to tech companies once they were public, explaining why tech companies would see a big markup in valuation when they went public. But now retail investors get access to the best private tech companies through the Fidelitys of the world, so there is no pent-up demand when a company goes public.”
The cost of hiring and keeping tech employees continues to rise in Los Angeles.
Wolpert: “Tech employees in the Bay Area, even ones fresh out of school, expect to see an exit and become a multimillionaire within a year or two or they get antsy and jump ship. That has not been an issue here in L.A., but I am concerned that with the heated competition, it could begin to be an issue. Also, the salaries for tech employees in L.A. have been meaningfully less than those in the Bay Area, but I see a lot of inflation happening in salaries for tech employees in L.A.”
In what could be a cost-saving paradigm shift for the aerospace industry, Elon Musk’s Space Exploration Technologies Corp., known as SpaceX, landed its Falcon 9 rocket vertically on Earth on the night of Dec. 21 after sending about a dozen satellites into space.
The mission was the first time SpaceX had successfully landed a rocket after sending it into space. The launch and landing was the Hawthorne company’s first attempt since June, during which a previous rocket exploded midflight. SpaceX had previously failed at attempts to land its Falcon 9 rocket on a water barge.
SpaceX’s rocket deployed 11 satellites for telecommunications company Orbcomm of Fort Lee, N.J., after lifting off from Cape Canaveral, Fla. The devices completed a 17-satellite, low-orbiting constellation that will help facilitate communications for Internet devices.
The ability to land vertically is prized because it allows rockets to be reused, substantially reducing costs and increasing the frequency of launches. SpaceX’s Falcon 9 rocket reportedly costs about $55 million to launch.
“Elon can’t say this, but ‘nail in the coffin’ for traditional launch industry,” tweeted Peter Diamandis, chief executive of Culver City’s XPrize Foundation, a nonprofit that awards cash prizes for science and engineering accomplishments. “No way to compete with Falcon’s reusability and performance.”
Musk sits on XPrize’s board.
Inexpensive rocket travel will fundamentally change the space industry, Diamandis said in a follow-up email to the Business Journal.
“Lower launch costs mean more space-related endeavors, more startups, more space tourism, more space businesses,” he said. “It will be hard for any company to possibly compete unless the U.S. government keeps them in business to maintain a second supplier.”
Jason Fairchild, chief revenue officer of online ad marketplace OpenX of Pasadena, was appointed co-chair of the IAB Programmatic Council, an industry group that develops technical standards and best practices for the online ad industry.
Staff reporter Garrett Reim can be reached at email@example.com or (323) 549-5225, ext. 232.