Los Angeles Business Journal

Sowing Startups

Special Report: Tech Finance By Tom Dotan Monday, April 15, 2013
Adam Lilling

Adam Lilling Photo by Ringo Chiu.

Despite the low-stress appearance, tech is a notoriously competitive industry, with companies going under quickly and investors angling for a crack at the most promising startups. But for the new financiers of the L.A tech boom, there remains a youthful spirit of the collective.

“The level of collaboration you’ll see is amazing,” Lilling said. “People who are raising their own funds helped me to find (contributors) for my fund. That’s almost unheard of in investing.”

As for the investments themselves, the tech financiers are looking for a return that’s about 10 times the initial investment. It’s a level that gives a satisfying return to people bankrolling a fund as well as covering the losses from the bets that went wrong.

The funding lifecycle of a startup generally begins with a small round from friends and family, maybe for $25,000. That initial spark gives a newborn company enough life to raise a seed round, led by angel investors and smaller venture capital funds. The size of seed funds vary by a company’s needs, but average in the low seven figures.

Once a business has hit its benchmarks and is gaining a quantifiable market value, larger firms join the subsequent A and B rounds. Investments can easily soar past $10 million at this point, and a company’s equity begins to be split up among the venture capital firms. Beyond that, investment rounds get larger and the equity pie continues to be sliced, until, hopefully, a startup “exits” – either it gets acquired or debuts in an initial public offering – and shareholders can cash out.

Common threads

Speaking with dozens of angel as well as early and midstage venture capital investors reveals a few common insights.

First, the cost of launching a company has gone down over the last decade. More than anything, say venture capitalists, that’s the reason the current tech investment climate feels more reasoned than it did during the late-’90s tech bubble. Advances in technology, as well as increased connectivity to the Internet through mobile devices, means companies can build products and acquire customers more efficiently, thus requiring smaller upfront investments.

For that reason, the local startup scene is dominated largely by funds of $50 million or smaller that are willing to make six- or low-seven-figure bets on early stage companies.

Trying to figure out exactly which companies are worth those investments brings up another piece of shared wisdom: It all comes down to the entrepreneurs.

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