Built in LA report shows that the LA startup ecosystem has come a long, long way

By Michael Carney , written on April 26, 2013

From The News Desk

There has been no shortage of talk both in and out of Los Angeles about the rise of the LA startup ecosystem over the last 12 to 18 months. As someone who’s been on the ground and deeply embedded in the community, I can attest that it has been a period of astounding growth and maturation.

The problem has always been that there was little data available to back up otherwise subjective claims like these. That’s no longer the case, thanks to a new Built In L.A. 2012 Digital Startup Report.

The report, released on Wednesday of this week, details the year that was arguably the most prolific in terms of company creation than any in the city’s history. In total, some 220 startups launched in Los Angeles in 2012 – and believe it or not, not all of them came out of Mike Jones and Peter Pham’s Science.

The ecosystem as a whole raised $847 million during the year from 170 different VCs and angel investors, with more than 100 companies securing funding of at least $1 million during the year. There were 11 fundings over $20 million in size, another 12 between $10 million and $20 million, and 20 more between $5 million and $10 million.

Additionally, 43 LA-based companies were acquired, the most of any year on record. The largest check written was Tencent’s acquisition of majority interest in Riot Games for $400 million, in a transaction valuing the company at $472 million. This deal was followed closely by Sony’s $380 million acquisition of Gaikai (which was located a few miles south in Orange County).

“The spotlight on the Los Angeles digital technology economy is shining bright, as government, media, large corporations, major universities and investors from around the country are taking notice -- and now we have the data to prove it,” Pritzker Group patner and Built In L.A. board member Tony Pritzker says.

More interesting than tracking the individual dollars and cents is looking into the categories into which they flowed, and in which founders are building new companies.

Despite on-the-ground evidence that LA does build “deep tech” companies (more on that coming in a future post), the data proved that stereotypes exist for a reason. LA has long been known for its digital media prowess, and its proclivity to build celebrity and fashion driven ecommerce portals. Not surprisingly, then, these were the first and third fastest growing categories with 24 and 21 new startups forming in digital media and fashion commerce respectively.

Perhaps less predictable to those not paying close attention, LA is also home to one of the nation’s healthiest ad-tech ecosystems. Given that, it should come as no surprise that the second fastest growing category in 2012 was advertising and marketing startups, with 22 new companies formed.

The investment dollars followed the company formation trends to a certain extent, with the fashion commerce and digital media categories leading the way by attracting 22 percent and 19 percent respectively of all capital flowing into the region last year. Adtech and marketing, on the other hand, was No. 5 on the list behind the financial and gaming categories, receiving only 8 percent of LA’s investment dollars despite its overrepresentation in terms of new company formation.

JustFab, a women’s fast fashion online retailer, was the region’s top fundraiser with $76 million dollars raised. Nasty Gal raised its own $49 million over two rounds during the year, while BeachMint, a direct competitor of JustFab’s, raked in $35 million in the first quarter (before its foundation began showing serious cracks). In the digital media category, Maker Studio, Viddy, and Machinima were the big winners in terms of filling their bank accounts, with the companies raising $41.5 million, $37 million, and $35 million respectively – although we’ve since been reminded that raising the maximum amount possible can often create more problems than it solves.

A central element of the LA ascendancy story has been the arrival of multiple accelerators (Launchpad, Mucker Lab, Amplify, and Start Engine), technology studios (Science), and early stage funds (Lowercase Capital, Karlin Ventures, SV Angel, Plus Capital, and Double M Capital, among others). With this foundation of capital and mentorship, more of the city’s plentiful technical talent stayed local and pursued entrepreneurship – something that couldn’t be said just a year or two ago.

The very existence of Built In L.A. is another sign that LA is taking entrepreneurship seriously. The group is an “online community for digital entrepreneurs and innovators” formed out of the Los Angeles Mayor’s Council on Innovation (LAMCII). Built In LA’s board and advisory council includes a who’s who of local investors, entrepreneurs, and policymakers committed to fostering technical innovation.

As we turned the calendar to 2013, I laid out my wish list for the ecosystem over the coming year. And while the stats compiled by Built In L.A. echo the momentum I’ve personally seen in the market, they indicate that there’s still progress to be made. LA needs to continue to prove its ability to build deep technology companies – fashion and digital media simply aren’t everyone’s cup of tea, be they founders, engineers, or investors.

The ecosystem also needs to get back on the IPO train. A few local companies file, or prepared to file, in 2012, but none actually pushed the launch button. The last major listings were Demand Media in January 2011 and Cornerstone On Demand in March of the same year. In 2013 and 2014 many are hopeful of see several listings, including likely candidates LegalZoom, Rubicon Project, Adconion, and SpaceX among others. Its crucial that several of these companies to plant LA flags on Wall Street and bring back with them the credibility and (hopefully) prosperity that comes with such a milestone.

Finally, LA still needs more local capital at the Series A stage and beyond. Look back at the largest deals completed in LA in 2012 and you’re unlikely to see an LA lead investor. It’s good news that top tier investors like Andreessen Horowitz, KCPB, Benchmark, Accel Partners, Battery Ventures, General Catalyst, and others have shown increased willingness to invest in LA. But there’s inherent value in having capital and the associated advisory resources local. For the LA ecosystem to take the next step in its maturation, additional late stage capital is a must. (For what it’s worth New York is facing the same challenge.)

As GRP Partners general partner Mark Suster says, "Los Angeles has developed into a city that every investor must watch."

[Illustration by Hallie Bateman]