The L.A. tech industry had a great run this year.
Venture capital investment in L.A. County tech companies is estimated to reach a record $1.6 billion this year, according to database CB Insights of New York.
But next year they may 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 of global economic growth and expected increases in the Federal Reserve interest rate suggest a more difficult economic environment for businesses next year.
Venture capitalists and tech executives don’t expect another dot-com bubble implosion but rather a cooling off in tech funding and valuations.
We spoke with several L.A. tech 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:
Higher Federal Reserve interest rates will have little direct effect on venture capital investments, but may 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 non-essential, 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 mark up 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 multi-millionaire 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 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.”