Tapping Into Group Effort

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Los Angeles has always been a hotbed of opportunity and creativity. But even with the highest number of entrepreneurs living here of any U.S. city (580 per every 100,000 adults, according to a Kauffman Foundation study), it still remains better known for its entertainment industry than any entrepreneurial spirit.

Though that could all be about to change with the rise of crowdfunding – a means to raise capital in small amounts from a large group of people from the Internet and social media.

Suggestions that this phenomenon could change the perception of La-La Land were very much in evidence at a recent gathering of leading local and international innovators, visionaries and investors. Many attendees at the first annual Next Generation Entrepreneurship and Global Crowdfunding Forum at Santa Monica on Nov. 16 saw crowdfunding as the clearest path to an economic comeback.

One of the distinguished speakers, Howard J. Leonhardt, founder of the California Stock Xchange, predicted: “Crowdfunding will bring the grandest expression of human creativity and economic growth ever seen in the history of human civilization and will unleash the dreams, will and burning desire of people who want to show what they can do – particularly those who have never been given a chance before.”

Others pointed out how crowdfunding has the potential to transform and democratize the funding industry by putting a lot more capability into the hands of the public – who have already proved their financing power. According to the Global Entrepreneurship Monitor in 2010, while $9.4 billion was committed by angel investors, $41.6 billion in private capital came from friends and family.

More recent data reveals further insights: In 2011, 4.8 percent of the U.S. population personally provided funds for new businesses while only 1 percent of the population was represented by venture capitalists and accredited investors (who must have an annual income of at least $200,000 or more than $1 million in liquid net worth). Moreover, the number of accredited investors dropped last year by 12.5 percent and was roughly just about 120,000 people.

The unconventional truth that was revealed at the forum was that formal investors do not have enough capacity to back all of the startups. Two prominent entrepreneurs, angel investors and founders of leading local accelerators, David Carter (of the Amplify business accelerator) and Howard Marks (of StartEngine), agreed that they don’t have to compete with each other as there is plenty of businesses to go round.

Carter noted that out of 2,000 applications, Amplify invested in 16 ventures.

According to Marks, StartEngine’s current portfolio includes 42 companies and with that, the number of companies that are backed by the remaining L.A. accelerators is believed to be about 100. But with 400,000 registered businesses in Los Angeles and 4,000 local engineers who are graduates from the country’s leading schools, the number of “accelerated” ventures should be much higher.

“There is no doubt the amount of (entrepreneurial) activity in Southern California has never been close to this level and it continues to expand,” said Rick Smith, managing director of Crosscut Ventures, who has been a venture capitalist for more than 15 years and who is very optimistic about the L.A. investment climate.

“Local accelerators are bringing new companies and entrepreneurs even from outside of California.”

Long way to go

Los Angeles – and particularly the Westside technology hub dubbed Silicon Beach – still has a long way to go to match Silicon Valley, known worldwide for such brand-name IPOs as Facebook and Yahoo. The AngelList presently names 5,861 startups in Silicon Valley, almost four times as many as in the whole of Los Angeles.

But Los Angeles doesn’t have to have “the next Facebook” in town in order to earn public acceptance as a technology hub, for crowdfunding can transform the startup ecosystem of the city.

A note of caution was sounded by Hale Boggs, a partner at Manatt Phelps & Phillips LLP, a leading L.A.-based law firm focused on emerging ventures, who told the forum: “While the concept of the new asset class is exciting … a lot has to do with how the regulations about all this come down (from the Securities and Exchange Commission). And the reason that they have not come down yet is that the regulators are struggling about the amount of disclosure and what kind of disclosure has to be provided to everyone out there who can write a $50 check or even less. … It really does make you wonder – can it really work?”

The entrepreneurial and investment community is mostly positive that it can – and that Los Angeles can be at the forefront. With L.A.’s famous creativity and flexibility plus the present boom of its digital media and technology industries, it is clear that the city is a vibrant place for startups, and the forum revealed a lot of potential synergies.

The future is bright – and apparently that future is being crowdfunded.

Victoria Silchenko is founding partner and chief executive of Metropole Capital Group in Century City and an organizer of the Next Generation Entrepreneurship and Global Crowdfunding Forum.