Looking back to look ahead: Venture Almanac data shows a healthy and maturing SoCal startup ecosystem
As we wind down the year and look ahead to 2014, it’s important to take stock of how far we’ve come and where we can improve in the years ahead. Late last week, CB Insights released its LA Venture Capital Almanac report, which seeks to quantify and distill the growth of the venture-backed startup community in the greater Los Angeles area over the last five years (beginning in 2009).
It’s a lot of data to take in, but the picture that it draws of LA is instructive.
According to the report, there were 525 venture capital deals closed in the region over this time period, totaling $3.55 billion invested capital. (Note: This data excludes angel investments, regardless of stage.) By comparison, New York saw 1,205 deals and $8.04 billion over the same period, although the regions were at closer parity 2012 and 2013 than in the earlier years in question. Silicon Valley remains the gold standard of startup ecosystems churning out 3,308 deals worth $31.5 billion during the same period.
Of the LA deals in the five years analyzed, $943 million was invested across 130 in the first 11 months of 2013, with the region projected to reach $1.003 billion and 136 by year’s end, making it the most prolific of the five years analyzed. To quantify the increase in venture activity, consider the fact that the first three quarters of 2013 saw 42 percent more deals completed than all of 2009. The region has seen 30 or more venture deals completed in each of the last six quarters. It's progress to be sure, but it still means LA trailed New York and Silicon Valley over the last half decade.
Of course, not all of this capital is created equal. In 2013, those billion or so dollars were divided as 6 percent Seed investments, 16 percent Series A, 35 percent Series B, 16 percent Series C, 11 percent Series D, and 16 percent Series E and beyond. The biggest change year-to-year came in the Series A category, where this year’s investment-share was the second lowest in the five years analyzed – can you say Series A Crunch? – and is down from 30 percent of all dollars invested in 2012.
In terms of deals completed, Seed stage investments still dominate the region, making up 35 percent of all deals. This is down from a high of 43 percent in 2012, but up from its five-year average of 25.6 percent. The rest of the 2013 transaction distribution looked like 25 percent Series A deals (down from 28 percent in 2012), 17 percent Series B (up from 9 percent), 6 percent Series C (up from 5 percent), 4 percent Series D (down from 5 percent), and 12 percent Series E and beyond (up from 7 percent). The lack of late-stage investment, both in aggregate and even more so from local VC firms, will be a big trend to watch in the coming years.
The Internet and Mobile & Telecom sectors attracted the lion’s share of 2013 investment dollars at 56 and 24 percent respectively, followed by Non-Internet/Mobile Software at 13 percent, Computer Hardware at 5 percent, and Electronics at 2 percent. Hardware may be back, but Web and Mobile still dominate the VC universe, especially in LA.
The most active investor in the LA region over the last five years was an out of town firm, 500 Startups. Although, to be fair, it has been one of the most active investors globally as well. Locally, the most active investor has been Double M Partners, followed by Upfront Ventures, Siemer Ventures, and Crosscut Ventures. Other non-LA firms represented in the Top 10 most active list include SV Angel, Founders Fund, Founder Collective, Lerer Ventures, and ff Venture Capital.
Looking solely at the Seed category, 500 Startups and Crosscut lead the pack, followed by SV Angel, LA’s Baroda Ventures, and Upfront Ventures. With signaling risk a real consideration when accepting Seed capital from VC firms, it's noteworthy that Lerer Ventures has proven the firm most likely to follow-on in later rounds, followed by Upfront Ventures and Founder Collective. In the later stage category, non-LA firms Accel Partners (a Pando investor) and Azure Capital Partners shared the top spot on the most active list followed by a dozen firms tied for third-place. LA would do well to cultivate its own growth-stage firms to compete with these imports.
All this cash and deal flow is great, but at the end of the day, it’s all about returns and thus exits. The LA region saw 59 exits between 2009 and 2013, although nearly all occurred in the final three years. By comparison, New York had 137 exits through the four-and-a-half-years ending midway through 2013, and Silicon Valley has had 637 exits in just the last four years. Fifteen of LA's exits occurred in 2013, compared to 24 in 2012 and 20 in 2011. More than any other state in this report, this figure illustrates the depths to which the LA tech ecosystem fell in the mid-2000s and the steady rise which it has seen in the last half-decade. It also illustrates one of LA's biggest remaining weaknesses.
Rustic Canyon Ventures saw the most exits from its portfolio over this period, followed by Clearstone Venture Partners, TomorrowVentures, and Benchmark Capital all tied for second-most. The largest exits in the region were Bessemer Venture Partners-backed Cornerstone OnDemand’s $464 million IPO (IPO) – the company now trades at $2.76 billion; Benchmark-backed Riot Games which sold an 80 percent stake in the company to China’s Tencent at a $480 million valuation; Menlo Ventures-backed EdgeCast’s $350 million sale to Verizon; Rustic Canyon-backed Gaikai’s $330 million sale to Sony; Ignition Partners-backed ServiceMesh’s $325 million sale to CSC; and Insight Venture Partners-backed Hautelook’s $210 million sale to Nordstrom. Of this list, only Rustic Canyon is an LA firm, meaning that the majority of the spoils from the region's biggest exits went to out of town investors.
Looking ahead to the next generation of headline grabbing exits, one metric to consider is who are the most highly-funded private companies in the region. According to CB Insights, the answers are TrueCar ($352 million), SolarFlare ($169 million), JustFab ($164 million), Specific Media ($132 million), and SnapChat ($123 million). The Top 10 is rounded out by Adconion, LegalZoom, Newport Media, Oculus VR, and MarketShare. Thankfully, BeachMint’s $84 million didn't even get it onto the list.
A lot of data to take in, sure. The big takeaway is that LA’s venture ecosystem is both maturing and healthy. But it's still trails New York on aggregate and remains a far cry from the juggernaut that is Silicon Valley. The region could use more exits, and more late-stage capital, but that’s something that’s well known and which I noted around this time last year.
If anything, the increase in venture activity over the last five years from both a dollars and deals perspective suggest that the region is positioned for more progress, and hopefully a few blockbusters over the next half decade.