Tech Merger Frenzy in L.A. Highlights New Set of Startups

Photographer: Leonard Ortiz/Corbis

Oculus VR's founder, Palmer Luckey (left) and CEO Brendan Iribe, at their Irvine headquarters. Close

Oculus VR's founder, Palmer Luckey (left) and CEO Brendan Iribe, at their Irvine headquarters.

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Photographer: Leonard Ortiz/Corbis

Oculus VR's founder, Palmer Luckey (left) and CEO Brendan Iribe, at their Irvine headquarters.

Two takeovers in two days are putting a spotlight on Southern California’s role as a hotbed for technology startups.

Facebook Inc. (FB) said March 25 that it agreed to buy the virtual reality company Oculus VR Inc., based in the Orange County city of Irvine, for at least $2 billion in cash and stock. A day earlier, Walt Disney Co. (DIS) plunked down a minimum of $500 million for Maker Studios, a supplier of shows for YouTube that has its headquarters in Culver City, next to Los Angeles.

Southern California has developed enough talent and financing for a self-sustaining community of tech startups to take root and grow, from the seed capital stage on up. Local universities are pushing entrepreneurship programs, the flow of venture capital money is on the rise and earlier startups have helped attract talent that’s remained instead of moving north to Silicon Valley.

“There’s been a proliferation of both angel and seed capital over the last couple years, and that’s allowed companies to stay here, build and grow,” said Paul Bricault, a venture partner with Greycroft Partners, a backer of Maker Studios.

Facebook’s interest in the region came to light last year, when Chief Executive Officer Mark Zuckerberg unsuccessfully tried to buy SnapChat Inc., a mobile photo-sharing service in Venice, a beach community on the west side of Los Angeles.

The company, founded by two Stanford University graduates, turned down his offer of about $3 billion, people with knowledge of the matter said at the time.

Bricault, who’s also managing partner of Amplify.LA, which assists startups, said the climate for new businesses has changed over the past two decades.

Staying Put

In the past, entrepreneurs in Southern California would leave as their funding needs grew and not return, he said. Now “companies are not only electing to stay here, but they are drawing capital from outside L.A. to fill the gap.”

Southern California ranks No. 3 worldwide for technology startups, behind Silicon Valley and Tel Aviv, according to a 2013 report by Be Great Partners, a technology incubator based in Los Angeles.

A concentration of immigrants and universities are driving the growth in technology businesses, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.

Some companies are big enough to be considering initial public offerings. The Rubicon Project Inc., an online advertising company based in Los Angeles, expects to raise as much as $132.4 million in an offering of up to 7.79 million shares at $15 to $17 each, according to a regulatory filing.

Car Culture

TrueCar Inc., an online auto shopping service, attracted a $30 million investment from Microsoft Corp. co-founder Paul Allen’s Vulcan Capital in December. The Santa Monica-based company is working with Goldman Sachs Group Inc. and JPMorgan Chase & Co. on a possible IPO, people familiar with the matter said in November.

Venture capital financing in Los Angeles and Orange counties has amounted to more than $17 billion over the past decade, according to data from PricewaterhouseCoopers LLP. The two counties cover almost 5,000 square miles, about the size of Connecticut, according to Census Data.

The number of deals in the region rose to 267 in 2012, the highest since 2004, according to Esmael Adibi, head of Chapman University’s Center for Economic Research in the City of Orange, citing PricewaterhouseCoopers statistics.

Small Business

The role of digital business in the region is still small relative to the wider local economy, which is led by shipping, the entertainment industry and construction, as well as aerospace and fashion. Los Angeles is the largest manufacturing center in the U.S., according to Mayor Eric Garcetti’s Office of Economic and Workforce Development.

Small and midsize businesses play a particularly large role in Los Angeles, according to Helena Yli-Renko, director of the Lloyd Greif Center for Entrepreneurial Studies at the University of Southern California.

The back-to-back sales of Oculus and Maker Studios underscore how vibrant the startup climate has become, said Bricault, whose company oversees investments of $400 million.

“If you look today, the number of companies that have raised money in excess of $500 million and their private market valuations, it’s probably higher than it ever has been before,” he said.

In Los Angeles, employment in e-commerce and digital entertainment has climbed 24 percent in the past five years to 14,920 jobs, according to the Milken Institute in Santa Monica.

Homegrown Companies

“Los Angeles and Silicon Beach are profiting from the shift to digital entertainment leveraging the large number of entertainment workers already living in the area,” said Kristen Keough, a Milken research analyst.

Locals shouldn’t view the sales of homegrown companies as a setback for the regional economy, Yli-Renko said. Oculus plans to continue running independently, while Maker Studios will remain in Culver City.

“Both of these companies look to be at the point where they can really benefit from additional resources to grow and expand, so I don’t think there’s a negative to it,” she said. Oculus and Maker Studios have demonstrated “strong proof of concept and strong proof of market adoption.”

To contact the reporters on this story: Rob Golum in Los Angeles at rgolum@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net Anne Reifenberg, Ben Livesey

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