People often debate which is more important to entrepreneurial communities, companies or investors. But there’s no arguing that access to capital is integral to any thriving entrepreneurial community. Over the last three years, the Los Angeles tech community has seen skyrocketing numbers of startups launch and raise venture capital. But local capital availability hasn’t kept pace.
Today, there’s a new early stage investor committing resources to the market with the launch of Karlin Ventures. The fund is a division of the $1.4 billion private investment firm Karlin Asset Management (KAM).
LA has been growing at such a rapid clip that it’s no shock investors are drawn to the market. Even more enticing, it’s commonly held that Seed and Series A investments here are generally valued at a discount of around 30 percent to comparable companies in Silicon Valley – something that’s largely true in New York, Chicago, Austin, and other emerging tech markets. Entrepreneurs surely won’t be thrilled to hear this, but investors appreciate the added mileage on their dollars. The discrepancy is likely more a representation of frothy conditions within the northern market, than it is a lack of quality in LA.
Karlin Ventures will be operated by Managing Partner Tianxiang (“TX”) Zhuo, a sharp and personable Stanford MBA who was previously an associate with Eric Schmidt’s Innovation Endeavors, a consultant at McKinsey & Company, and, shortly after graduating undergrad, the founder of ecommerce startup EMT Alliance.
Zhuo declined to offer a specific fund size, instead calling it “evergreen” and saying that he plans to make 10 to 12 seed and Series A investments per year, each in the $100,000 to $1 million range. The fund will put aside capital for follow on investments which could extend to through series B and total upwards of $2.5 million per portfolio company.
The young investor Zhuo will lean toward the sectors where he has personal experience, namely education technology, digital media, healthcare IT, and financial services, but says he won’t limit Karlin’s investments. “For us, geography is more important than industry,” Zhuo told me over coffee a few weeks ago. “We are extremely committed to investing in LA.”
Karlin Ventures has already made three investments in town since quietly opening up shop less than three months ago, and it currently has another two under close consideration. The early recipients were smart cloud wallet provider Wallaby Financial and voice response and analytics platform Saygent. The third transaction has yet to be announced publicly.
The new firm’s structure offers a number of advantages to entrepreneurs. It can move extremely quickly, particularly given that Zhuo is the only investment professional on staff. Also, the size of the capital pool and the extent of the infrastructure available across KAM mean the firm has more resources to offer than most seed funds in town.
KAM is the financial vehicle of Los Angeles spinal surgeon Gary Karlin Michelson, who in 2005 received a $1.4 billion settlement in an intellectual property suit with medical device-maker Medtronic. Michelson was ranked 328 on the latest Forbes 400 list of richest Americans. His family office currently invests heavily in public equities, real estate, commercial finance, and mortgage lending.
The investment firm has planned to launch an early stage investment vehicle since inception, according to KAM CEO David Cohen, who says that it decided to finally pull the trigger based on the strength of the current entrepreneurial environment.
One of the most common criticisms of LA as a startup ecosystem has been the limited availability of capital. Karlin is one of several new investors planting flags in town, including several funds in the process of raising capital, as well as others like New World Ventures and Lightbank relocating and increasing focus on the market, respectively.
With LA continuing to mature, expect more capital to find its way to the market. In all likelihood, the market discount that’s currently available won’t be once the supply and demand equation is flipped on its head. Karlin is smart to enter the ecosystem at a time when it can still say it’s one of the few deep-pocketed investors fully committed to LA.
[Image source, Karlin Ventures]