Image via ™ Pacheco/Flickr CC
The Los Angeles startup market is ready for its close-up.
With the Snap, Inc. (SNAP) IPO on the horizon, the city renowned as the entertainment capital of the world can finally showcase on the big stage of finance that its economy is about much more than Hollywood, and it has been for a while now. In fact, Los Angeles’ tech scene and startup ecosystem is widely regarded as one of the largest and fastest-growing markets in the world, home to companies like SpaceX, The Honest Co., Acorns and many more. It’s also had a number of billion-dollar exits like Dollar Shave Club, NantHealth (NH) and The Trade Desk (TTD) just in the past year.
But the Snap IPO, whose $22 billion valuation is a whole different animal, could be just the beginning of LA tech’s next growth phase. According to Rob Freelen, Los Angeles Market Manager for Silicon Valley Bank, large exits like Snap tend to create a snowball effect through which startup ecosystems replenish themselves.
Silicon Valley Bank would know. Founded in 1982, the bank has been an integral player to the rise of Silicon Valley’s startup scene—with a client list that includes Zendesk (ZEN), Twilio (TWLO), Twitter (TWTR) and Andreessen Horowitz—and has expanded to a number of rising startup centers around the world.
Equities.com recently spoke with Freelen to get better insight on how the LA startup ecosystem has been thriving, the impact of the Snap IPO on its growth trajectory, as well as the longer-term potential of this rich and diverse startup hotbed.
EQ: Can you tell us about Silicon Valley Bank and how you help facilitate funding and growth for the startup and Venture Capital space, particularly in the Los Angeles scene?
Freelen: We've had a presence in Los Angeles for several decades, and we have been helping companies with everything from capital to connections to venture capital, from bank accounts to standard foreign exchange products and such. One of the things that is interesting in this market is that it’s grown substantially in the last five years, and for sure since our office was founded. What we're seeing today is a tremendous increase in the number of companies that are hitting scale. Whether you define that as $10 million or $20 million in revenue, companies are finding scale in Los Angeles very easily. That’s one of the hallmarks of a market.
For us, we've found that the Los Angeles market has increased in the size, in terms of both number of clients and market share over the last couple of years, given our attention that we've been paying to that segment of companies. And what that means for us is we can take all the resources that Silicon Valley Bank brings to bear, and deploy them on behalf of those companies. That could mean helping a company get liquidity for the founders through one of the groups that we work with, or lending to a company in advance of an IPO or late-stage equity round and putting some debt in their capital structure, or maybe simply helping them grow their business by using one of the products that we've built, such as our API banking platform that allows the easy facilitation of payments between a business and a vendor. All of those things, we've seen to be very meaningful additions to the trajectory of a business here in LA, and the velocity of those transactions have increased substantially just in the last two years that I have been in LA.
EQ: Startups, by their nature, tend to look to more innovative and unconventional methods to grow more efficiently. How do you work to accommodate the many unique needs of your various clients?
Freelen: When it comes to Silicon Valley Bank and how we differentiate ourselves, one of the tried-and-true reasons people come to us is the way we lend to early-stage companies, both in how much of it we do and how early we do it. However, over the last couple of years, our API banking platform and team that helps facilitate payments has become a key component of what differentiates us. We're one of the few banks in the world that offers an API integration. We saw a substantial increase in interest of this in 2016 and even more so in 2017 so far. Our ability to see a need on the part of the company and willingness to take a chance to help them fill the need helps them solve real business problems. One of the ways I have been most impressed with our team at SVB is in thinking about what startups are going to need and building products to suit them. It’s one of the things that I think is highly differentiated.
EQ: The LA Tech scene is colloquially known as Silicon Beach, which initially was kind of piggybacking on Silicon Valley’s reputation as a startup hub. But as this market's matured, it’s carved out its own distinct identity. In your opinion, what are some similarities and differences the LA startup scene versus that of Silicon Valley?
Freelen: Given the size of Silicon Valley, every tech center in the United States is going to be a sub-center of what exists there. I think what’s unique about Los Angeles is that the face of LA tech is not easily stereotyped. There is not one kind of company here in LA that reigns supreme. Yes, digital media is a significant portion of the companies that exist here. However, there are companies solving really hard problems. There are the large ones everybody knows about like SpaceX, but we also now have Hyperloop One based in Downtown LA, which is trying to solve a very big transportation issues. We have SaaS and enterprise companies like ZipRecruiter, Velocify and BlackLine (BL), which just IPO'd last year. So, we have components of Silicon Valley. We have components of startup ecosystems all over the world solving the big problems, enterprise problems and consumer problems.
There is a myriad of consumer companies here in LA, and I think that is where LA really shines. It’s the DNA of Los Angeles in that it has so much embedded talent with the ability to tell stories. That’s one of the things LA companies do really, really well. Companies like a Ring Video Doorbell or a Laurel & Wolf have the ability to connect with their clients. Those companies’ abilities to have that discourse and connection with their customers and end-users is a unique differentiator in terms of both saving marketing costs as well as having them find scale quickly.
EQ: Where would you say the LA startup market ranks in terms of the top startup centers right now?
Freelen: The LA market is one of the top three in the US. If you look at all the data that’s provided by companies like Pitchbook and the MoneyTree Report, you'll find that LA is somewhere between number one and number four. LA is the number one as the fastest growing ecosystem and between number three or four in terms of new company formation. LA has long had entrepreneurs. The entertainment business is chock full of them. Everybody is working on a lot of different projects. LA's tech ecosystem is now seen as one of the hottest in the country by Silicon Valley Bank when you look at other players in the startup ecosystem. You'll find lawyers starting to put offices here, you'll find temporary finance consultants and some CFOs starting to come here. They’re putting a meaningful presence here in Los Angeles because it’s one of the major growth areas in the US.
Then you can also see that the number of companies and fundings have substantially increased in all segments. That’s not just in the sectors where LA has excelled historically—digital media, consumer, adtech and e-commerce—but also in those segments that haven’t been widely popular, like enterprise software, which is common in the Bay Area. The Bay Area is ground zero for enterprise software, but we're starting to see companies move out of San Francisco and New York. They’re coming to Los Angeles because their founder wants to live here, or maybe simply to be outside of the echo-chamber that is Silicon Valley. It is driven largely by the desires of the founders. Also, the costs of creating a company in New York,Silicon Valley, and San Francisco, are very, very high. They burst at the seams. LA is not only a key market today, but will continue to be a key market for the coming decade.
EQ: For all the success and growth that its had, the LA startup market still does not have a major IPO under its belt. That all can change with Snap’s IPO. Do you see that potentially changing the dynamic of the market in any way?
Freelen: A successful Snap IPO will undoubtedly create very good things for the LA tech ecosystem. Number one, that is how technology ecosystems regenerate themselves. It’s like supernovas in that a company like Snap grows large, it bursts apart and it spreads little bits of itself all throughout the surrounding area. One of the first ways that we'll see that in LA is potentially Snap employees will become liquid after the company goes public and become angel investors. Or, as those employees start to retire and start to leave, they themselves start to simply make investments back into the ecosystem. That will be the first great step.
The next great step will be where highly notable executives start to leave and form their own companies. That process of regeneration in startup ecosystems is not only critical but it’s very exciting. So, a successful Snap IPO is the best thing that could happen to the LA startup market, and by extension Silicon Valley right now.
On the topic of not a notable exit, two things happened last year that we shouldn’t forget. Number one, Dollar Shave Club sold for a billion dollars to Unilever, which is a great exit. It’s one of the top e-commerce exits in venture capital history. Number two is that BlackLine went public in October, and so as those employees of BlackLine get past their lockup period, there will be similar dynamics with both of those companies. Both are very, very different, but both have talented management teams with the capacity to go and start their own companies.
Image via 阿奇/Flickr CC
EQ: Where do you see this market going in the next five years or so?
Freelen: One of the things I'm most keenly focused on are those companies that are currently at $10 million to $20 million in revenue, and helping them get to $100 million to $200 million in revenue. That will be really exciting. What it’s going to take to get them there is for LA to continue to attract capital. So, one of the things that we do at Silicon Valley Bank is try and connect our entrepreneurs to Silicon Valley investors. One of the simplest ways to do that is by hosting events at our space in Santa Monica with Silicon Valley investors who invest in series A, series B, and series C companies. Hopefully, in putting those two parties together in the same place at the same time, we can help facilitate connections to equity capital. If LA is lacking in one thing, it is that growth-stage, later-stage venture investor. We're finding tremendous demand from outside of Los Angeles in the companies that have grown up here. We see it as our responsibility at Silicon Valley Bank to continue facilitating those connections and help our clients get to the later stages of their evolution.
Now, in terms of other trends that I am excited about over the next five to 10 years, I'm really excited we have several stealth companies in our portfolio that are tackling very big problems. Some of them are societal, some of them are transportation, and some of them are liquidity for new industries that have never had a publicly traded security. With those companies tackling big issues, it will only help diversify the LA tech ecosystem even more than it is today outside of its core four pillars of e-commerce, consumer internet, digital media and advertising technology.
EQ: There has been a lot of discussion around what jobs should look like in the modern economy. More and more people feel the need to take control by becoming entrepreneurs or adapting to the “gig economy”. How does the supernova effect you described earlier, in which new entrepreneurs and investors are created from every major exit, reinforce that view of the economy in the future?
Freelen: That is certainly a 10-year question, right? We've clearly moved out of the manufacturing age and into the digital age. So, what happens after that? I think one of the first trends that we've seen here in LA is that rush of gig economy companies, and some have failed, some have succeeded and some are still working towards success. My hope is that we will continue to see those companies tackling the more tactical issues of our age. But also that we will continue to see companies like Hyperloop pushing the envelope towards a massive, systemic change. There are really interesting companies starting to be formed. There is one fascinating stealth company that is trying to disrupt part of the car industry, and they're going after a totally new way to finance vehicles. While that is not putting people on the moon, it is potentially transforming an industry and providing massive liquidity to an entire group of people who are trying to sell their vehicles and are having a hard time. So, I want to see the LA tech ecosystem pushing forward on both ends of that spectrum, the more tactical as well as those highly strategic ones for our society.
EQ: In the past two years, we’ve seen Reg A+ and Equity Crowdfunding go into effect. While it’s still early, what are your thoughts on the impact it’s had on startups?
Freelen: We have seen a slew of firms engaging in trying to help companies raise more capital. You’ve got Crowdfunders and StartEngine, just to name a few. They seem to be having early success. But I think the question that I have for that industry is simply, what’s the next step? Are we going to have another market entirely that is outside of the traditional New York Stock Exchange and Nasdaq? Are we going to see private IPOs? Will those small IPOs begin to happen in great waves, or not? I don’t have the answers for you, but I am very encouraged by their early progress and I am excited to see another potential source of capital come into this market.
EQ: These are great insights that you have provided. Any closing comments before we wrap this one up?
Freelen: I’ll tell you one closing comment: I think 2017 and 2018 are going to be really good years for LA tech. There are some IPOs in the works, and whether these companies actually go public or are acquired during the IPO process, LA tech has a great two years ahead of us. It’s impossible to see into the future other than that, but I have hope that we're on a great trajectory and that we will continue to see the ecosystem flourish.
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