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Why Los Angeles Is Emerging As The Next Silicon Valley – Forbes Magazine

08/2012

Why Los Angeles Is Emerging As The Next Silicon Valley
Bruce Upbin, Forbes Staff

Written by Nate Redmond, managing partner of Rustic Canyon Partners, an early-stage venture firm with offices in Los Angeles and San Francisco.

Ask an entrepreneur or venture capitalist to name the center of technology entrepreneurship and they’d probably all say the same thing—Silicon Valley. For the past three decades the region has had a lock on the creation of dominant technology companies, from silicon to search to social.

Ask the same group to name the next Silicon Valley and you are likely to hear a variety of answers. Some will offer up New York. Others stick with Boston and New England. But if we project forward based on trends in the data and structural advantages, it is Los Angeles that is emerging as the next Silicon Valley. Over the last three years the Los Angeles region has quietly built momentum, establishing the foundation to become the next hub for technology entrepreneurship.

For the better part of the last two decades, Southern California and New England have traded roles as runner up to Silicon Valley. In 1995, before the Internet bubble was in full swing, Southern California attracted $1.3 billion of venture capital investment, second only to Silicon Valley with $1.8 billion. New England was a distant third with $0.8 billion. In this era, Southern California was a clear number 2. By 1999, the promise of the Internet attracted a new crop of entrepreneurs to Silicon Valley and investment in the region skyrocketed nearly 10-fold. During the same period, New England grew quickly and edged out Southern California as the next most attractive area for venture capitalists to invest and for the following five years, New England laid undisputed claim to the runner up title.

The baton is once again changing hands. Over the last five years Southern California closed the gap with New England and in 2012, entrepreneurs in Southern California once again attracted more investment than any other region outside of Silicon Valley. More than New England and nearly twice as much as New York.

We shouldn’t be surprised that the LA-led Southern California region is once again emerging as the next Silicon Valley. After all, the region boasts three structural advantages.

Entrepreneurial culture. Southern California has long been a place where independent minds come together to collaborate and create, where visionary entrepreneurs build lasting companies. We’ve seen it in aerospace, apparel, and entertainment and now increasingly in technology. The innovative thinking and design talent has found an outlet in the Internet to impact a new set of industries, including commerce, games, video, and data.

Los Angeles is different than New York and Boston, where professional service industries and corporate headquarters still shape the tone for the region. In those cities, big companies often overshadow entrepreneurship and creative endeavors. In Los Angeles, entrepreneurship is pervasive. New York is home to 45 Fortune 500 companies. Despite it’s comparative size, Los Angeles is home to only 5. Moreover, according to a recent Kauffman Foundation study measuring levels of new business creation across the United State, Los Angeles had the highest rate of entrepreneurial activity from the period between 2009 and 2011. Simply stated, people don’t come to Los Angeles to work for big companies, they come to LA to create them.

Significant technical talent. With a heritage of engineering and technical innovation, Los Angeles continues to develop technical talent. Universities in Los Angeles produce more engineering graduates than any other county in California—including in Silicon Valley. These graduates provide the skill and energy that is vital to the growth of technology companies. In addition, LA is increasingly attracting graduates and other experienced technologists from across the country and the world. More venture capital is invested into software in the region than any other sector—more than three times the amount invested into media and entertainment. Google’s significant presence in the region is composed of a majority focused on technical and product. And the company is rapidly growing in LA.

Availability of capital. There are strong investors emerging in LA to partner with entrepreneurs building technology companies in the region. While entrepreneurs in both New York and New England can find local capital partners, entrepreneurs in Los Angeles have an advantage in their proximity to the Valley. By far the largest concentration of venture capital firms are in Silicon Valley. And as the venture capital industry has consolidated over the last decade, the concentration of capital in Silicon Valley has increased even more. According to the NVCA, of the 38 firms that successfully raised new funds this past quarter, five accounted for nearly 80% of the total dollars raised. All five were either based in Silicon Valley or had a significant presence.

Some wrote off Silicon Alley with the bursting of the bubble as investment into the region collapsed in the years that immediately followed. But New York has enjoyed a resurgence of activity over the past five years and the migration of VCs from Boston to New York indicates where they see the relative opportunities. The press has written extensively on this shift and if total mentions was the primary indicator of success, New York would be the clear odds-on-favorite to become the next Silicon Valley. But many whisper about the continuing challenges of finding enough great technical talent and competing with the cash compensation offered by the banks (underlining the defining culture).

The bottom line is this: through the cycles, the structural advantages enjoyed by Los Angeles and the surrounding region has it once again attracting more venture capital than any other outside of Silicon Valley. It is these same dimensions that create a long-term advantage. Lasting technology companies from ActivisionBlizzard to Qualcomm were built in Southern California. Amazing entrepreneurs are building the next slate today.

http://www.forbes.com/sites/ciocentral/2012/08/28/why-los-angeles-is-emerging-as-the-next-silicon-valley/