Mark Suster on his big LA bet: The infrastructure has been built and we monetize better than anyone

By Michael Carney , written on October 24, 2013

From The News Desk

It’s one thing to be supportive of your local startup ecosystem. It’s entirely another to dedicate your career to putting that ecosystem on the map.

Anyone who regularly reads Mark Suster’s Both Sides of the Table blog or who follows him on Twitter knows that he’s a big believer in Los Angeles. (Just don’t call it Silicon Beach when he’s around.) He moved here from Palo Alto to join Upfront Ventures, which was called GRP Partners at the time, and has been the central figure in launching the city’s original accelerator, Launchpad LA.

At last night’s PandoMonthly fireside chat, the two time entrepreneur turned VC dove particularly deep into what he thinks makes the LA tech ecosystem tick.

LA will never be Silicon Valley, Suster says. And that’s perfectly okay. But understanding the differences between the two markets underscores the reasons why many of LA’s biggest success stories of the early Internet era didn’t turn into multi-billion companies, and why today’s companies have a better shot at doing so this time around.

LA is famous for its creativity. And outside the technology sector, LA has demonstrated as much as the home to Hollywood, the music industry, the textiles market, and much of the US defense sector innovation. This undercurrent of creativity, and a related ability to empathize with the average consumer spill over into the technology products created here.

But LA’s biggest strength, according to Suster, is its ability to monetize.

“They say necessity is the mother of all invention,” Suster says. “LA companies monetize early, because they must. It’s true that there have been some companies here that raised $75 million early on, but most don’t. Silicon Valley has mega funds that are willing to take mega risk on Stanford PhDs and try to build the next Cisco. That doesn’t exist here. ”

Out of this necessity, however, came the two most successful online business models in history – Paid Search and Semantic Search. Collectively, these innovations underpin Google’s $340 billion-plus market cap, and both were developed by LA companies.

“We built the monetization of the internet,” Suster says. “The most profitable business model on the Internet was built in LA in a company by the name of Overture, which we backed. [The founder was] Bill Gross, who I think is a genius.”

Paid Search was a cringeworthy idea for Google in its early days, Suster recalls. When Gross first announced his new online monetization concept at the TED conference, he was booed. But fast forward a few years and, following a failed merger between the two companies, Google went on to duplicate Overture’s technology and business model. Yahoo later acquired the Pasadena-based company for $1.6 billion in 2003.

“Google won – Google kicked Overture’s ass,” Suster says. “If Overture had [turned into] Google, I think LA would be a different town today.” Of course, you could say the same thing about MySpace and Facebook.

Things ended up different with LA-based semantic search pioneer Applied Semantics than it did with Overture, as Google managed to acquire the company in 2003 for $102 million. Applied Semantic was founded by brothers Gil and Eytan Elbaz. Notably, both Gil Elbaz and Bill Gross were CalTech graduates. Eytan Elbaz graduated from UCLA.

It’s not just search advertising that was pioneered in LA, Suster notes. Many of the most successful affiliate networks and lead generation companies in history were built here, including Commission Junction, FastClick, ValueClick, LowerMyBills, PriceGrabber, and ShopZilla. Like Overture and Applied Semantics, none of these first generation LA tech companies went on to become “the next Google,” but many of them exited for between $500 million to $1 billion.

More recently, LA has also pioneered many of the subscription and celebrity business models that have driven the latest wave of ecommerce growth. But the pattern for LA tech has been one of inability to create massive, standalone companies. Comparing LA to a down on his luck character in a movie, Sarah Lacy asked Suster what has been LA’s biggest flaw that keeps companies here from breaking out.

“There’s a theme here of mistakes we’ve made,” he says. “Lack of technical skills – I know that doesn’t fit the script but we made bad technical choices. And lack of capital.”

Silicon Valley excels at building infrastructure, Suster says, which gave companies like Google and Facebook major advantages in the early days of the Internet. But the core infrastructure has been built, for the most part, meaning that applications that run on top of this foundation can begin to thrive. Chris Dixon provided a similar analysis during his PandoMonthly earlier this year, saying that New York and LA are on the rise because they are application cities.

Suster is confident that the current wave of LA companies are well positioned to capitalize on this shift. Perhaps nowhere is he more bullish than around the emergence of online video.

“If you buy the argument that media consumption patterns won’t change – [that people will continue watching] six hours of video [per day], maybe it goes down to five and a half, but it’s actually increasing – then you have to buy that there is something going on in LA that puts us for the first time in history in the pole position,” Suster says.

And it’s not just his portfolio company Maker Studios he says, pointing out that Fullscreen, Big Frame, ZEFR, Tastemade, Machinima, and others are all well positioned to make LA ground zero for the next generation of digital entertainment.

“It has never been possible to build this many companies outside of SV in the history of the tech industry, and that’s why I’m long LA,” Suster says.

[Image via LA Times]