Late last week, CB Insights released a report on the “booming” Los Angeles tech ecosystem. It’s the kind of analysis the research house does so frequently that it’s easy for it to be lost among the noise. But the report’s data was telling in a number of ways, revealing several macro trends that are unique to the LA region and others that have played out similarly on a national basis.
CB Insights looks at the maturation of the LA tech ecosystem over the last five years, from 2009 through 2013, concluding that investment dollars have risen 163 percent over that time from $590 million to $1.55 billion in angel and venture cash flowing into the region annually. Over the same period, the number of completed deals have skyrocketed 180 percent from 108 to 302 per year. Notably, 2013 was the most active year in both categories within the region.
While we are still mid-year, 2014 seems to be following a similar growth trend with Q2 representing the most active quarter in a deals and dollars since the beginning of the five year period. The headline deals during the period were Swagbucks’ $60 million growth round (its first ever outside financing) led by Technology Crossover Ventures, and TeleSign’s Adams Street Partners and Summit Partners co-led $40 million Series B.
The narrative around LA has long been that the region is under-capitalized, particularly in the later stages. But with 24 percent, 32 percent, and 21 percent of all capital raised in the region in 2013 going to Series A, B, and C rounds respectively, it’s hard to argue that capital isn’t flowing into the region. (Where that cash is coming from, is another matter, but more on that later.)
The percentage of dollars going to seed deals peaked in 2012 at eight percent of all deal flow, up from just two percent in 2009, and falling only slightly in 2013 to seven percent. In gross dollars, however, the story looks different, with Seed investment continuing to rise, growing from just $11.8 million in 2009 to more than $108 million in 2013. A similar arc is visible in the deal-share, as seed deals grew from just 17 percent of all transactions in 2009 to a peak of 57 percent in 2012, before falling slightly to 47 percent in 2013.
In turn, the Series A market peaked at 41 percent of all dollars invested in 2012, up from just 19 percent in 2009 before falling considerably to 24 percent in 2013, thanks to more activity at the Series C, D, and E stages. But in raw dollars, Series A deals have grown from $112 million in 2009 to $426 million in 2012, falling ever-so-slightly to $372 million in 2013. On a deal-share basis, Series A transactions have actually been declining from a peak of 32 percent in 2010 to a low of 26 percent in 2013. This shift, while it’s a reflection of the Series A trap, is also an indication of the changing definition and benchmarks of Seed and Series A deals.
It’s notable, given the Seed and Series A peaks, that 2012 was very much the year of the accelerator in LA with more than a half-dozen such startup building machines opening their doors for business that year. Like it has nationwide, the accelerator market in LA has contracted in the ensuing two years, as both founders and later stage investors have looked to separate those adding real value from those who were not. Predictably, this has meant fewer seed deals and dollars invested in 2013 and early into 2014, but also means that there are more companies navigating the later-stages of fundraising – hence the growth in those categories. What’s unclear is what this reversal will mean longer term with regard to the rate of company formation and capital allocation in LA. Stay tuned.
A list of the most-well-funded private companies includes some familiar faces and somenew, but perhaps not in the the order outside observers might expect. For example, Snapchat is just the fifth most-well-funded company in the area, despite its once eye-popping valuation and its successive deca-million dollar rounds. The leader in this category is fashion ecommerce juggernaut Justfab at $215 million raised.
The so-called Internet sector – which, I must say, is rather poorly defined – has dominated all funding activity in LA, representing between 68 percent and 74 percent in each of the five years analyzed. While not specified by CB Insights, a look at the winning companies in the region indicates that ecommerce, advertising technology, and content have been the big sectors within this larger category. The biggest change over the last five years – both locally and nationally – has been the rapid emergence of mobile, which in 2013 represents 22 percent of all deals completed in LA. This is reflected in some of the region’s hottest names like Snapchat, Whisper, and Scopely – not to mention the IAC-owned Tinder.
When looking at the most active investors in the region, it’s revealing that at the early-stage (Series A and B), the list is dominated by local firms, with Upfront Ventures leading the way and only 500 startups cracking the top ten as an out of town firm (SV Angel, at number 4, is headquartered in Silicon Valley but managing partner David Lee now lives in LA). At the mid-stage (Series B and C), however, the picture looks different. Redpoint Ventures, which hasn’t had an LA office for several years, remains the most active investor in this stage, while Benchmark Capital is tied for second with three local firms – Clearstone Venture Partners, Upfront Ventures, and Greycroft Partners. The rest of the top ten is dominated by non-LA firms. The story is even more clear at the late stage, with only Upfront Ventures cracking the top ten most active firms (T2).
In other words, LA startups may be accessing more capital than ever before, but the more mature the businesses become, the more likely it is that capital will come from outside the region. Whether this is a bad thing depends on your perspective. Worthy companies are still finding the cash they need to grow. However, there are undeniable advantages to having investors and their respective networks of resources (talent, business development and corporate development contacts, service providers, etc.) local. One possible explanation for the seeming inability for LA startups to break through that mythical $1 billion valuation plateau (Snapchat notwithstanding) and continue operating independently is this lack of institutional support and mentorship. Shoedazzle’s spectacular fall from grace is the classic example of an out-of-town board asleep at the wheel.
Looking into exits over the last five years, the report reveals that these transactions have increased annually since 2011, with 2013 seeing a total of 84 exits including EdgeCast Network’s $350 million sale to Verizon and Goodread’s $150M sale to Amazon. Not reflected in this report is the downright prolific first half of 2014 which saw several blockbuster deals, none bigger than Facebook’s $2 billion acquisition of Oculus VR.
But while the M&A market has been heating up, the IPO market for LA startups is all but non-existent. CB Insights notes that six of the ten largest exits by valuation were IPOs, but these deals have represented less than 1 percent of all exits in the last two years. As a result, LA has a relative dearth of large, stand-alone technology companies that can act as pillars of the community, drawing (and later shedding) talent and capital. This began to change somewhat in early 2014, after this report was compiled with two marquee and long anticipated IPOs in TrueCar and Rubicon Project. Others on the horizon are thought to be JustFab, OpenX, Honest Company, YP, and SpaceX.
Like any startup ecosystem outside of Silicon Valley, LA is still finding its legs and its identity. But, as the data shows, the region is rapidly maturing by every conceivable metric including company formation, access to capital, late stage company growth, and exits. Where LA can improve is by keeping more of its best companies local and independent, and by funneling more of the returns created by these winners into local investors’ coffers.
One thing that’s clear in looking at the CB Insights data, is that LA is a market that’s heading “up and to the right.” Don’t be surprised to see that trend continue. (Please just don’t call it Silicon Beach.)