Year-to-date data shows LA to be a maturing startup market with more upside ahead

By Michael Carney , written on July 15, 2013

From The News Desk

It’s easy for armchair observers to throw out criticisms and accolades when talking about startup ecosystems, but rarely are these backed up with sufficient data. When data is available, however, it can lead to some informed debate. To that end, earlier today Built in LA released an overview of the startup formation, investment, and M&A activity in the Los Angeles ecosystem in the first half of 2013. It follows the group’s similar but more detailed year-end 2012 Digital Startup Report, which we discussed previously.

While the sentiment on the ground in LA has been one of a market slowing ever so slightly following a blistering 2012, the stats in today’s report don’t bear that out. At a high level, 1H 2013 resulted in 94 new companies formed, more than $500 million raised by 92 companies, and eight companies exiting, resulting in more than $153 million worth of value realized. (Just two of these eight acquired companies reported transaction values publicly, and similarly many of those raising financing did not disclose round sizes.)

Digging deeper, 22 companies raised rounds of $5 million or more, of which 15 raised $10 million or larger, six raised $20 million or larger, and one was larger than $50 million. The 10 most sizeable transactions were: Snapchat ($88M), FullScreen (~$30M), Science ($30M), OpenX ($25M), TopLine Game Labs ($25M), Marketshare ($20M), SendUs ($17M), Spin Media ($15M), DAQRI ($15M), and Ouya ($15M).

Among those exiting in the first six months of the year were mFoundry (FIS, $120M), Awesomeness TV (Discovery, $33M plus incentives), (Target, undisclosed), FreeConference (Lotum, undisclosed), Echograph (Vimeo, undisclosed), WePlay (TeamSnap, undisclosed), HYFN (Lin TV, undisclosed), and Yakify (Otozip, undisclosed). None of these deals are of the once-in-a-generation, ecosystem-making variety, and all took the M&A rather than IPO path.

There are a number of LA IPO’s in the offing and other rapidly-growing companies still within the ecosystem. But like New York a decade ago, LA appears to be a few years away from its first truly massive and independent hit.

From the above data it would appear that concerns about a lack of later stage capital available to LA companies were misplaced. LA companies often have to look outside the local market for larger rounds – the above listed financings illustrate this reality – but for companies that are performing well, capital is more mobile than it has ever been. This trend has also abated to a small degree thanks to $100 million-plus funds raised by local firms including UpFront Ventures and Greycroft Partners, with others like MK Capital and Rustic Canyon Partners looking to follow suit.

An unfortunate consequence of LA being the new kid on the technology block, is that many of the above companies and transactions failed to get the attention they likely deserve, thereby adding to the underperforming narrative. But this something that will presumably change over time.

One legitimate concern that is difficult to assess, based on Built in LA’s data, is the availability of talent and any impact that may have on growth. LA produces more engineering graduates than anywhere in the nation, but isn’t as effective as it could be in retaining or allocating this young talent to high-growth technology companies. The city also struggles, relative to its nearest competitors San Francisco and New York, to recruit out of town graduates to relocate. Both are issues of intense focus by leaders of the local startup community and worth keeping an eye on as the ecosystem matures.

Eighteen months ago LA announced more than half a dozen new incubators in the midst of an explosion of angel and seed-stage venture capital in the market. Naturally, this led to a hype cycle that has since cooled, but appropriately so. It seems LA is now being measured for results, rather than promise, which is also appropriate. The market has moved beyond stereotypical sectors of ecommerce and content to build a wide range of hardcore technology companies, many of which are among the most promising locally.

In total, the latest Built in LA report paints a picture of a healthy ecosystem that is seeing relative success at all milestones within the startup lifecycle, including formation, growth, and exit, although it would surely welcome more of each. More importantly, the very existence of a group like Built in LA, and the availability of data that it compiles, suggests an ecosystem that takes its growth seriously and aims to continue improving by evaluating its own progress, strengths, and weaknesses.

Given the momentum the above data illustrates, the recent optimism around LA is justified despite the occasional hyped company gone bust – which is par for the course in the startup game – and the market will can be expected to continue maturing with time.

[Image source: RGICO]