Sun Is Shining Bright on L.A. Tech Town Silicon Beach

Photo Credit: Investor's Business Daily

Photo Credit: Investor's Business Daily

By Brian Deagon, Investor's Business Daily, July 6, 2015:

Many cities have tried to build themselves into major technology hubs where entrepreneurs build startups that reach the big time. Northern California's Silicon Valley remains the tech leader, but other areas aspire for second place as a tech center.

A rising aspirant is Los Angeles, home to the recently anointed "Silicon Beach." Like Silicon Valley, S.B. has no set boundaries, but it centers on coastal town Santa Monica and its neighbor, Venice, and includes Playa Vista and other parts of west L.A. The area's packed with tech startups and some publicly traded companies.

"L.A.'s tech ecosystem is really taking off in terms of turning innovation into real companies," said Gil Elbaz, CEO of Factual, a data analytics platform for mobile devices that he founded during 2008 in L.A.

"The area has always been very innovative, but in the last five years we've seen this magical uptick in terms of everything coming together — the talent, ideas and investors," Elbaz said.

In 1999, Elbaz co-founded a Santa Monica company that Google (NASDAQ:GOOGL) acquired in 2003 for $102 million. That company, Applied Semantics, became a key part of Google's multibillion-dollar AdSense advertising platform.

That same year, Yahoo (NASDAQ:YHOO) bought Pasadena-based ad-tech company Overture for $1.6 billion in its bid to challenge Google.

It's a common L.A. story that some of its best home-grown technology gets acquired and shipped north to Silicon Valley. But this time might be different.

One prime example is Venice-based Snapchat, the quirky messaging platform with 100 million active users. Two years ago, Snapchat turned down a $3 billion offer to be acquired by Silicon Valley's Facebook (NASDAQ:FB). Snapchat is growing fast.

The L.A. tech area includes El Segundo, home of DirecTV (NASDAQ:DTV), and Culver City, which includes Apple's (NASDAQ:AAPL) Beats Electronics. Other hotbeds for tech startups include Burbank and Pasadena. But the sun is shining brightest on Silicon Beach.

Santa Monica, a city of eight square miles, has 1,827 tech businesses, according to the local Chamber of Commerce. It has another 572 businesses in arts and entertainment, a sector that often feeds into tech. Its largest business employer is video game giant Activision Blizzard (NASDAQ:ATVI), with 899 employees in the city. Video game developer Riot Games has 712 employees there. China Internet giant Tencent Holdings (OTCPK:TCEHY) bought a majority stake in Riot Games for $400 million in 2011.

Moreover, Google recently plopped down a reported $120 million to acquire 12 acres of vacant land in a large business park in Playa Vista. The acreage is next to Google's 40,000-square-foot YouTube production facility, where local artists can create content for the online video site. Google's main presence in Silicon Beach is in Venice, where it leases the 69,000-square-foot Binoculars Building. Google employs several thousand people in the two workspaces.

Other big tech companies with a large presence in Playa Vista include Microsoft (NASDAQ:MSFT), Yahoo and Belkin Electronics, a large producer of consumer technology, including the Linksys Wi-Fi system.

The Silicon Beach-area tech companies are diverse. Many focus on entertainment and gaming, cloud-based e-commerce, online ad technology and social networking. The area also has a large number of business incubators and accelerators — 11 in Santa Monica alone — to help startups fly.

"There will never be another Silicon Valley, but L.A. is creating a thriving ecosystem," said William Hsu, co-founder and managing partner of Mucker Capital, which operates business accelerator MuckerLab in Santa Monica. "It's a lot different now than when I moved to L.A. in 2006."

One difference is that L.A. now has a cadre of battle-hardened serial entrepreneurs, people who have built several companies and attracted millions of dollars of venture capital. Some of those companies went bust, but that's part of the learning process. Serial entrepreneurs mentor new talent.

Among the area's entrepreneurs is Scott Painter, CEO of TrueCar (NASDAQ:TRUE), the Santa Monica-based provider of an online car buying service. TrueCar raised $70 million with its initial public offering in May 2014.

Another is Frank Addante, CEO of Rubicon Project (NYSE:RUBI), an ad technology company that raised $102 million with its IPO in April 2014. Rubicon is based in Playa Vista.

Santa Monica is also home to Cornerstone OnDemand (NASDAQ:CSOD), an online provider of human resource services that made its IPO in 2011. Nearby is Demand Media (NYSE:DMD), which went public the same year.

"L.A. is a great city to build a company," Elbaz said. "It has incredibly talented individuals and a huge, diverse industry base."

It's been a work in progress for many years. L.A. and neighboring Orange County in the 1980s were home to pioneering computer, software and data storage leaders. After a dry spell, tech resurged in the late-1990s Internet bubble before the bubble burst in 2000.

The difference now is that L.A. has the four core ingredients that sparked Silicon Valley.

The first is the solid base of serial entrepreneurs.

The second is a center where entrepreneurs gather to exchange ideas, inspire each other and find talent. For Silicon Valley, it started with Palo Alto, Calif., home of Stanford University and the city where Hewlett-Packard (NYSE:HPQ) was founded in 1939. "Silicon Valley" branched out from there to nurture the likes of Cupertino-based Apple, Santa Clara-based Intel (NASDAQ:INTC), San Jose-based Cisco Systems (NASDAQ:CSCO) and many many others.

Sprawl has plagued L.A., with its tech hubs spread far apart. But Silicon Beach has emerged as a main hub.

A third key ingredient is the support of local universities. Like Stanford in Silicon Valley, Silicon Beach gets much help from graduates of USC and UCLA. Many say that the two universities had not been helpful in assisting budding entrepreneurs. But entrepreneurs say that the two esteemed universities are finally providing the inspiration and tools to foster startups.

The fourth core ingredient is venture capital. Silicon Valley has Sand Hill Road, the address for some of the largest venture capital firms. L.A. has no such address, but the Los Angeles/Orange County region received $1.65 billion in venture capital funding in Q1, according to the National Venture Capital Association. That's the most for any U.S. region after Silicon Valley's $6 billion.

"While L.A. has a small number of local venture capital firms compared with Silicon Valley, a lot of (VC firms) come here on a regular basis," said Ben Kuo, founder of SoCalTech.com, which chronicles the area tech scene.

Drawing in venture capital requires headline-grabbing transactions. Silicon Beach is starting to show more of them with the IPOs of TrueCar and Rubicon, and with Apple's $3 billion acquisition of Beats Electronics, maker of the popular Beats headphones and provider of a popular streaming music service. Another was last year's $500 million acquisition by Walt Disney (NYSE:DIS) of Culver City-based Maker Studios, a leading supplier of YouTube videos.

"I hear more and more that entrepreneurs who have started companies in other cities are considering relocating to L.A.," Elbaz said. "L.A. has a fantastic talent pool and a great community of investors that offer a ton of support."

After 30 years in the making, the roots of L.A.'s tech community are firmly grounded, the center is crowded, the money is flowing and the beach is hot.

"There are thousands of entrepreneurs in this town," Hsu said. "L.A. has hit the tipping point."