Benjamin Kuo’s Blog

I spent last night at a private technology/venture capital networking event in West LA last night, and in speaking with more than a few entrepreneurs have been pleasantly surprised to find that Southern California (and in particular, West Los Angeles) has become — as I think of it — a startup destination. What I mean by a “startup destination” is there are an increasing number of companies who are choosing to locate in Southern California for their startup — not because they live here, or because of personal reasons, or because of being a spinoff from a company or university research — but because it’s seen as a beneficial place to make your company succeed.

For a long time, the only startup destination was Silicon Valley — usually, Palo Alto or surrounding cities– but often San Francisco and other cities in the Bay Area. But, now, it appears, Southern California (and in particular, West Los Angeles) is seen as being an area where there are lots of quality startups, where early stage companies can be with both other startups and possible partners, and where there is a supportive environment for growing and funding a company. I’ve mentioned this before, but I’m seeing this more and more.

I talked to a number of entrepreneurs (who, as an aside, had to do their pitch to VCs while being sniffed by bulldogs owned by Mahalo’s Jason Calacanis) all either recently located to the area, looking at locating to here, or very keen on moving into the area. For some, it was the proximity to consumer Internet firms like Fox Interactive Media/MySpace; for others, because of the studio/Hollywood influence, and for others, just because of the “technology scene.”

Provided these are startups who can either can gain funding, or bootstrap, into a profitable and sustainable business, this is good because it increases the interesting opportunities–for employees, venture firms, service providers, and the economy–and spawns more startup success and activity.

(below: Jason Calacanis and his bulldogs — who have more twitter followers than most startups — and who were busy distracting entrepreneurs from their pitches).

We’ve just posted a new article to our Insights and Opinions section, about The Rookie Advantage. This article comes from a well regarded, local executive (who has been involved in a couple of successful IPOs and a number of mergers & acquisitions here in SoCal)–but who wants to remain anonymous.

How Rookies and Startups Can Maintain Their Unfair Advantage

Late in the 1936 baseball season, a 17-year-old Iowa farm boy struck out
15 St. Louis Browns batters in his first Major League game. Shortly
thereafter, that same pitcher went on to strike out 17 Philadelphia
Athletics batters, an unprecedented feat for anyone, let alone a youth
with no professional sports experience.

How could such a young, inexperienced athlete baffle so many major league
veterans? The answer is simple: the Browns and the Athletics had the
misfortune of facing Bob Feller before anyone wrote The Book on him.

I’ve been quite interested to speak to a number of entrepreneurs recently, who have either recently raised some angel or venture capital, or are in the process of raising some money. They’ve all told me something — which (given the number of people looking for funding, and the correspondingly smaller number of sources of capital) isn’t very surprising: it takes time. A lot of time. A lot more time than you’d think, or want.

One startup I spoke to — whose principals, although they had lots of experience in their own industry but hadn’t had any experience raising money, and had just started fundraising — asked me if I thought they could get an investor signed next week. The vast majority of (funded) entrepreneurs I talk to had been looking for capital for at least six months to a year, if not more, before they scored their first funding round. I have seldom heard of anyone instantly getting a venture round — if nothing else, because of the time involved in pitching, arranging meetings, followup meetings, due diligence, getting all the legal ducks in a row, etc. etc. etc. Even after you’ve got a term sheet in hand, it may still be a few months until you actually have a check in hand.

Surprisingly, the idea that suddenly a rich investor with a fat checkbook can write you a check, today, is a very common misperception I hear from early entrepreneurs. Too many of them are — frankly — in somewhat desperate situations where they need capital NOW to pay their employees or vendors.

So, what’s my unsolicited advice to entrepreneurs, as it pertains to funding?

1. Assume it’s going to take some time to get funding–if it happens at all — and make sure you structure your business so you’re not desperate if there’s a delay. That means, you probably shouldn’t be hiring that employee before you can afford it, and you should forgo those cool Aeron chairs you saw the other day.
2. Look early, look often — if you are going to have some significant capital needs, you should be looking well before you need it — not the day before. And, make sure you’re constantly networking with sources of capital (angels, venture capitalists, others) before you need it.
3. Get your ducks in a row — especially for those early entrepreneurs, make sure you’ve already engaged with an attorney, have the proper legal structure for your firm, and have an adviser who has helped other companies through funding.  It also means you have to absolutely have the stuff that a venture capitalists or angel will want to see–ie, PowerPoint, financials, etc. –ready in your pocket. Not having all of that in order will just delay (if not kill) your funding.
4. Don’t rely on the timing of your first venture round — if you’ve never done this before, you have to assume that you will have to fund your business out of pocket, from family or friends, or another source until at some time you actually might have something venture fundable.
5. Keep moving forward – if you can, given your business, keep moving forward no matter what. The farther you go with your business — in developing your product, service, or market — the more likely it is you’ll actually get funding. A huge number of companies never get beyond the idea stage because the entrepreneur gets stuck in idea stage, where a company is least likely to find funding.

There’s a great quote (of Drew Lipsher of Greycroft Partners) which Scott Kirschner–a New England blogger and writer–recently posted from AlwaysOn Venture Summit East, about “entrepreneurs moving west to find money”

…if the entrepreneur doesn’t believe in his company enough to believe it can succeed here — they need to move it to Silicon Valley — then we don’t need to invest.

Although Lipsher is clearly referring to deals in New England, it’s worth noting–in my humble opinion–that for any technology startup, if you’ve got a sufficiently large opportunity and truly revolutionary technology or business, you will be successful anywhere. Whether that is Los Angeles, San Diego, Palo Alto, Boston, or Des Moines, if you are plugged into your market, have better technology/people/execution/etc. and the opportunity is right, it shouldn’t matter where you are located, physically.

(btw, It happens that Greycroft has an office in Los Angeles, headed by Dana Settle: the firm has invested in Irvine’s K2 Network, and Santa Monica-based ContextNext).

Omid Rahmat — former publisher of Tom’s Hardware Guide — talks talks about the next Internet wave in our Insights & Opinions section today. Omid has had a long and successful career in the publishing industry, and we’re honored to have his contributions…

If there is another Internet wave coming - a Web 3.0, a Bubble 3.0, or even a recessionary surge – it will surely involve a focus on stronger business models than ones dependent on social networks or pure ad plays. You have to believe that if everyone is chasing advertising technology, ad networks, and ad supported business models then, it is time to go the other way.

Sid Mohasseb, managing director of Venture Farm and an angel investor who is the incoming President of the Tech Coast Angels Orange County, recently added an article to our Insights & Opinions section – Managing the ripple effect — talking about the importance of watching performance indicators — even as a startup. It’s worth a read. Coincidentally, Venture Farm just made an investment in Vator.tv — an online video podcast with entrepreneur pitches — today.

The Los Angeles times just posted a piece speculating that more Web start-ups are on the rocks as investors are becoming more cautious.

The problem is, it’s very difficult to figure out if a company is having problems raising cash because the economy, or because investors are just not interested in their company. It’s much like the argument on Ivy League college graduates: does going to an Ivy League school make you smarter, or is being smart make it more likely you’ll go to an Ivy League school?

Is your company having funding because investors are pulling back on their investments, or are you having problems with funding because investors aren’t interested in your company to begin with?

Like many publicly traded companies who often use a “bad economy” as a convenient blame for a bad quarter–even though it was due to a management screwup– you’ll hear some venture investors tell you they’re just passing on your company because of the economy — “not your company, it’s nothing personal.” Just like they’ll also use the excuse that you’ve “got a great company, but it just doesn’t fit our profile,” or “this is a great idea, and we’ll get back to you.” It just goes with the territory — more startups fail to find funding than startups who do.

Does that mean there’s no impact of the economy on startups? No. There will be, and there will be harsh impact on some startups. But, unfortunately, so many companies — on a normal, even ultra bubbly day — can’t find funding, you can’t call a technology downturn using how many companies fail to find venture funding.

Despite the strangely giddy startup and venture capital market, I’m hearing from a number of sources about one place the woes of Wall Street are hitting the startup market now: in the willingness of angel investors to invest in companies.

I’m hearing that some angel investors — who typically have a great deal of their wealth tied up in stocks, bonds, and similar investments –  have been somewhat more conservative in their startup investments recently.
It’s not so much any reaction or response to the future prospects of the startups they are talking to, but more a function of how much disposable wealth they happen to have on hand at the moment.

Angel investors tend to make their investment decisions somewhat based on how much spare cash they might have from their other investments. On the other hand, I am hearing from some professional venture capital investors that they are encouraging and looking to inject larger rounds into the companies they do fund, to give them some cushion to glide over whatever kind of economic climate shakes out over the next couple of years.

The latest report from the NVCA has ranked the Los Angeles area as among the top areas for 10 year growth in venture investments, citing the change from 1997 to 2007 in terms of companies and dollars invested in the area. That growth–which only includes Los Angeles, and does not include Orange County or San Diego–is just a small part of the upsurge in startup activity in Southern California that I’ve personally observed over the last 10 years (socalTECH — in its hand-copied email form — started in 1998).

Interestingly, what appears to have happened — or is happening — here, is that we are going beyond what I think of as simple “critical mass” of self-sustaining startup activity and funding. Critical mass — which we’ve had for some number of years — is having enough entrepreneurs, anchor high tech companies, universities, capital, and service providers to create a healthy environment for startups. That can be achieved anywhere you have a set of anchor industries and companies — typically, larger and well established companies which attract and spin off engineering, marketing, and executive talent — and enough interested capital providers and the like to create new companies now and then. The key here is that most of the activity is generated by people in the community, moving from existing companies in the area. I’d argue this has been achieved in many “high tech” centers nationally.

However, going beyond that “critical mass” is what is only known as the “Silicon Valley” magic. That is, you are not just creating a few related new companies, spawing out new firms related to your existing industries; you’re now at the point where people relocate and seek your region out to start new companies. This is where people — with no family ties or company ties to your area — seek to relocate and start up their company where you are because it’s the “place to be.”

In technology, in the past this has always been Silicon Valley — which is packed with engineers and MBAs and others who have picked themselves up and moved to Silicon Valley, just to be “there.” Los Angeles — or more specifically, Hollywood — has always been “the place” for entertainment.  It’s the same with New York — think Madison Avenue, or Wall Street, or Broadway. Or, if you’re in Private Equity, Greenwich, Connecticut.

In the last six months or so, I’ve run increasingly into entrepeneurs who have specifically moved into the Los Angeles area to start up their companies. Often, it’s because of the convergence of technology, the Internet, and entertainment; in some cases, it’s the strong consumer orientation and online strength here. I’ve even heard of people who have relocated here because they want to be close partners with MySpace, and several because of the game studio presence here. It “feels” — very unscientifically — like we’re going beyond critical mass and becoming a destination where entrepreneurs go to fund and grow their companies.

We’ve just posted two new contributed articles to our startup section, the part of our site where we are taking articles from folks in the community on advice and information for entrepreneurs. The first is a list of five things an early stage company can do to ensure success, from Tech Coast Angel Ken Deemer. And, attorney Scott Edward Walker gives some tips on selling a business. We’re always open to good, balanced, and non-promotional material which might be helpful to entrepreneurs, so contact me if you’ve got something to share.