Startups Venture

How Los Angeles Earned The Name Silicon Beach

Over the past five years, venture funding to Los Angeles-area startups has quietly exploded. And industry observers predict that momentum will only increase as more startups and funds continue to launch, and grow, in the area.

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The region has seen some big successes in the startup world as of late with Snap going public, Dollar Shave Club being acquired by Unilever and the increased growth of companies like Ring (more details on all below).

Suddenly, the Los Angeles metro area is becoming known for more than its Hollywood scene and beaches.

The Deals And Dollars

Venture capitalists pumped $5.32 billion into L.A.-area startups in 2016 (based on rounds of known size), marking a staggering 322 percent increase from the $1.26 billion raised in L.A. companies in 2012. Deal volume surged 72 percent to 673 in 2015 compared to 391 in 2012 before slowing to 556 in 2016 – signaling larger deal sizes.

While deal volume and dollars raised in 2017 appears to be down so far, it’s important to note that not all deals have been reported and real dollar volume will likely be much larger as data comes in. (Recent data will always have some small lag to its reporting.)

Snap Effect

When Snap ­– the parent company of Snapchat – went public in a multi-billion IPO earlier this year, it helped cast Los Angeles in a new light. A city that has been historically known for its film industry was now home to one of the largest tech IPOs in some time.

Len Lanzi, executive director of the Los Angeles Venture Association (LAVA), said that was indicative of the direction the region has been headed for years. For example, LAVA’s membership has surged from a mere 100 in 2007 to its current 761 members.

“The full effect of Snap on the local ecosystem and economy has yet to be realized,” Lanzi said. “There has been a huge inflation of real estate prices in Venice and Santa Monica, somewhat due to Snap’s appetite for real estate.”

Snap’s IPO also provided an example of a company determined to forge its own path, in the mind of March Capital Partners’ Managing Director Jim Armstrong.

“So many companies not in the Bay Area get an offer and sell as soon as they get a little bit of traction and they’re never heard from again,” he told Crunchbase News. “What Snap showed this market is that if you believe in yourself and your vision, there can be a glorious outcome. People need these sort of bellwethers and examples. It’s inspiring for other startups.”

But it’s more than Snap’s success that is shifting the city’s venture landscape.

“There’s been a lot of new seed funds that have emerged here over the past couple of years,” Lanzi said. “And there’s always been a lot of innovation coming out of Los Angeles. These days the economy is doing better and there’s just a lot of money out there to be invested.”

As an example of an initiative to continue the ecosystem’s growth, LAVA in early October announced it was partnering with 10 universities and innovation research centers to launch the SoCal Startup Mill in an effort to boost high-potential technologies by linking them with experienced entrepreneurs and business leaders.

It Isn’t All About Tech

Los Angeles-based venture capitalists believe the region’s diversity is a huge advantage.

March Capital Partners’ Armstrong thinks many entrepreneurs historically felt they had to build tech companies in San Francisco or Silicon Valley.

“They didn’t necessarily want to, but felt they couldn’t afford not to,” he told Crunchbase News. “But I think that’s changed. There’s a growing recognition that you don’t have to be there. Plus, there it’s all about tech. The Los Angeles area simply has a more broadly diverse economy, environment and ecosystem.”

Armstrong also cites the diversity in neighborhood choices both in terms of setting up offices and buying homes.

“There’s a variety of economic choices here when it comes to areas – from Santa Monica on the higher end or Culver City and Pasadena on the less expensive end,” he said. “People just have broader choices here.”

March Capital launched its first fund in May 2016, raising $240 million. The firm is in the process of getting through the final pieces of its second fund.

Kevin Zhang, partner at Santa Monica-based Upfront Ventures, agrees with Armstrong’s assessment.

“I think people are bullish on LA right now because you have more diversity in the startups here as well as larger companies who are starting to spin out new entrepreneurs,” he said. “The talent pool has never been better.”

Zhang also points out there has been substantial capital inflow from LPs into LA, as evidenced by the establishment of new firms like Embark Ventures and Bonfire Ventures, as well as existing firms like Upfront raising new, larger funds.

“With the growing wave of capital, investments are naturally going to grow as well,” he said.

Upfront Ventures was founded in 1996 and just closed its sixth fund of $400 million. Of the 85 active companies in our portfolio, just over half are based in the Los Angeles area. L.A.-based startups make up about one-third of March Capital’s portfolio.

Hot Sectors

Upfront’s Zhang said the Los Angeles area is increasingly seeing more activity in frontier tech, deep science, and next-generation machine learning. This is due to a combination of  increased academic talent from the likes of CalTech, USC, and UCLA and industry talent coming from both frontier tech startups and existing aerospace companies.

Traditionally, sectors such as digital media and commerce have been big for the region but now more companies in computer vision, next generation VR/AR and robotics are setting up shop in the area, Zhang said.

One of the third quarter’s largest rounds, according to Crunchbase News research, was an $85 million Series B raise by Los Angeles-based Virgin Hyperloop One. Founded in 2014, the company’s super transport system caught the attention of Virgin Group founder Richard Branson who reportedly made an undisclosed investment in the startup this month.

Lanzi agrees.

“The great thing about this area is there are a lot of different industry sectors that thrive and survive,” he said.

In addition to Snap’s IPO, Lanzi pointed to the exit of the five-year-old ecommerce startup Dollar Shave Club as an example of the success coming out of the region. (The company was sold to Unilever in 2016 for $1 billion)

“Selling razors doesn’t sound like a special or brilliant marketing plan,” he said. “But it caught the attention of one of the big strategics and it sold at a premium.”

Then there’s also the success of Santa Monica-based Ring, which created the smart doorbell. The Shark Tank reject has so far raised $209 million from investors True Ventures, Kleiner Perkins Caufield & Byers, DFJ Growth and Goldman Sachs. It has 1,000 employees.

The esports industry is also growing at a rapid rate in the region, pointed out March Capital Partners’ Gregory Milken.

“There’s been a huge inflection point with the success of the convergence of broadcast and entertainment on the video game side, particularly when it comes to riot games,” he said. “There’s lots of tech, data and services being built up around the esports industry.”

Startup Perspective

Earlier this month, Los Angeles-based Fuel50 raised $2.5 million in Series A funding from Rincon Venture Partners and Bonfire Ventures.

The company offers a cloud-based career path software solution for companies such as Citibank worldwide. It has grown from 50,000 to 100,000 users in 2014 to more than 1 million today and has been “modestly” profitable since earlier this year, according to Co-founder and CEO Anne Fulton.

Fuel50 was originally founded in New Zealand but the founders decided to kickstart its U.S. operations in Los Angeles in 2014.

Fuel50 Founders Anne Fulton and Jo Mills love being located close to the beach. Photo Courtesy of Fuel50

“We felt it was an efficient location in that we could fly directly from New Zealand,” Fulton told Crunchbase News. “And it was a great decision. The Los Angeles venture scene has got incredible energy right now. We work ridiculous hours so having the beach close by to go for runs, well, that’s really really nice. Being part of that community works for us.”

Looking ahead, what’s next for Los Angeles is not necessarily clear. But if the increase in funding over the past five years is any indication, the region should only see even more investments in the coming years as the region slowly emerges out of Silicon Valley’s shadow.

Illustration: Li-Anne Dias

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