Digital Donnybrook Over Local Tech FundingMonday, April 29, 2013
Are L.A. investors a bunch of wimps?
That was the kernel of an argument buffeting around online among members of the tech community over the weekend. And though misinformation was plentiful during the row, it nevertheless provided an interesting snapshot (Snapchat?) of L.A. tech at this pivotal moment.
It began with an article by Michael Carney on tech news site Pando Daily. Carney was breaking down a study by the tech advocacy group Built In LA, which provided some statistics about the growth in the local startup economy.
Focusing on some fundraises in 2012, he looked at firms such as Andreessen Horowitz, Benchmark, Accel Partners, Battery Ventures, General Catalyst, and others. All are based in Silicon Valley and have led rounds for well-known L.A. startups.
Why, Carney asked, are so many later stage funding rounds (B, C and beyond) led by investors outside the region? His assertion was that for startups in Los Angeles to truly step to the next level there needs to local money playing for the big stakes.
It was a point furthered by author and professional tech mentor Patrick Vlaskovits, who, in the comment section of the article, called-out L.A.’s investor class as having "no risk appetite." The argument quickly, and inevitably, spilled over into Twitter.
Jim Andelman of Rincon Ventures tweeted that local funds aren't avoiding later rounds because it’s scary; they’re playing small because they are small. (Rincon, in Santa Barbara, focuses on seed investments and keeps contributions below $1 million).
Mark Suster of GRP Partners then came in swinging and tweeting that he found Carney's point "hugely misleading." The real problem, he said, isn't one of risk-averse local firms, but a dearth of mid-round investors. Aside from GRP, only two other local funds – Rustic Canyon and Greycroft – play in the $5 million to $20 million ballpark.
The question of how invested local VCs were in local companies was one the Business Journal looked at in a recent feature about Venture Capital.
After interviewing more than a dozen managing partners at venture capital firms, angel investors and private equity directors, we found a funding landscape that was rich with seed and pre-seed investors. And not a whole lot above that.
There was near unanimous agreement that the three firms that can lead A and participate in B and C rounds aren’t enough to sustain the economy on their own. For better or worse, Silicon Valley firms have filled that gap. But is that sustainable?
Distance does not yet appear to be a deterrent. Jeremy Liew, of Palo Alto's Lightspeed Ventures, has invested in ShoeDazzle, Snapchat and Whisper, and regularly checks in on them in person. Liew lives in San Francisco and said his daily commute to the South Bay Area isn't too different from SFO to LAX.
Vlaskovits' contention that local firms are afraid of risk is a hard claim to prove, at least without access to a venture partner's dream journals. Hard data shows they certainly are investing locally, and yet the startup scene is largely dependent on Silicon Valley money.
In the first quarter of 2013, 41 percent of the money that went into L.A. firms came from funds headquartered in the region. The remainder came from the Bay Area, according to a report from City National Bank using figures from Dow Jones VentureSource. That's a jump up from 30 percent in the previous quarter and part of a consistent trend toward L.A. playing the lead investment role.
Whether that fact settles the argument over the nerve of L.A. venture capital firms is another matter.