Los Angeles Business Journal

Technology Firms Look to Bloom Beyond Seed Funding

INVESTMENT: Lack of series A money may pinch growth plans. By Natalie Jarvey Monday, December 10, 2012

Collaborative community

Entrepreneurs and investors remain optimistic about the fundraising prospects for young companies despite concern about the lack of series A funding.

It’s not uncommon for L.A. companies to look to Silicon Valley or other markets to make up for the dearth of L.A. investments. This year, less than 25 of the nearly 200 investors in the Southern California market were local, according to data from SoCalTech, a blog that covers the local industry.

When Aaron Hirschhorn was raising series A funding for his Santa Monica startup, DogVacay – a marketplace that helps dog owners find pet sitters to watch Fido while they are traveling – he looked at investors in Los Angeles and Silicon Valley. Ultimately, Menlo Park VC Benchmark Capital led the $6 million round last month, with some of DogVacay’s existing L.A. seed investors also contributing.

Hirschhorn said the difference between the L.A. and Silicon Valley fund ecosystems was noticeable.

“There is a lot more deal flow up north,” he said. “There’s room for more series A or series B firms here. That hole will be filled by the firms in the Bay Area if there’s not more growth here.”

There’s always been a cyclical nature to the startup environment, with the best companies raising money and rising to the top while other less successful companies get left behind.

Karlin’s Zhuo said the environment in Los Angeles is more collaborative than cutthroat.

“Everyone has a vested interest in making L.A. succeed,” he said. “Companies refer each other to investors, and even the investors share deals all the time.”

While many other technology hubs are struggling with a decline in venture capital funding, investments in Los Angeles are on the rise due to the growing startup sector. Last quarter, 48 L.A. companies, most of them technology firms, raised money, up 4 percent from the same period last year, according to a report by PricewaterhouseCoopers and the National Venture Capital Association. The total amount of investments was up 9 percent to $324 million.

But L.A. VCs said the community needs to build up a better funding network so entrepreneurs don’t have to look elsewhere for early stage funding.

Young companies often benefit from hands-on attention from their early investors, something that is difficult for an investor in Silicon Valley or out of state to provide.

“The challenge with not having as much local venture capital is really that these companies do need to have investors and board members that are spending time with them,” said Greycroft’s Settle. “I think it’s important that there’s a local base of capital.”

Instead of viewing the funding gap as a problem, Steven Dietz, founding partner of GRP Partners, said it should be considered as an opening for more funds to be established in Los Angeles.

“The problem isn’t that there’s too much seed,” Dietz said. “The opportunity for everybody is to see more capital at the series A. I’d be happy for more local companies to get funded. Ultimately, it would benefit everybody.”

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