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Erik Rannala

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Almost 30 years ago, my father decided to uproot the entire family from Taiwan to the United States so that his  academically "inconsistent" son could have an education tolerant and perhaps even encouraging of his idiosyncrasies. As an entrepreneur himself, founding and operating printed circuit board factories in Taiwan, my father was debating between two places to immigrate to and build his next new venture: Los Angeles ("The Valley" . . .aka San Fernando Valley) and Santa Clara ("Silicon Valley").  At the time, LA and Santa Clara were both the epicenter of the technology industry due to the significant overlap between the aerospace/military industry (Los Angeles) and the computing business (Silicon Valley). In fact, in the 70’s and 80’s, the distinction was almost entirely semantic, as the military and aerospace industry invested ungodly amounts of capital to create technology breakthroughs that eventually saw wide commercial adoption in the personal computing industry.

Over time, though, military spending wound down and many large aerospace and military companies left Southern California. Los Angeles, at least metaphorically, became more of a media/entertainment town. At the same time, the consumerization of the technology business made Silicon Valley the de facto capital of all things tech.

My father eventually decided on Santa Clara (Saratoga, more specifically), and so I grew up in the shadows of the orchards of Cupertino and the nondescript concrete startup boxes of Santa Clara. After stints as a technology investment banker, a dot-com entrepreneur, and a product manager in Silicon Valley, I moved to Los Angeles in 2006.  For the last couple of years, I’ve been investing in startups as a partner at Mucker, while spending a lot of time in the Valley working with potential co-investors and partners.  My partner Erik Rannala has had a similar experience, having worked as a VC at Harrison Metal before moving down to LA to co-found our seed stage venture firm. Given our backgrounds, we often get asked about what makes the tech scene in Los Angeles different from that in the Valley. These are some of the major differences we have seen over the past few years:

“Quality” vs. “Sophistication”

Many arguments are fought about the “quality” of entrepreneurs and companies in Los Angeles. From my experience, it’s not necessarily about “quality,” but rather about “sophistication.” It’s probably not too controversial to say that the median level of sophistication of early stage entrepreneurs in Los Angeles is lower than that of Bay Area. If you took a random sample of 100 entrepreneurs here in LA, over 50% might not be able to tell you how to technically calculate 90-day cohort retention or how to build a cash flow statement. That number in the Valley might be closer to 10%.

We see a lot of great entrepreneurs with incredible market vision, loyal customers, and flawless execution who simply do not yet speak the same language as the typical Valley entrepreneur and executive.  This lack of “sophistication” does not always correlate with the lack of success. Encyclopedic knowledge of term sheets and startup buzzwords can be quickly learned, trained, and packaged. Investors in LA simply have learned to look for the underlying signals of “quality” rather than the more superficial symptoms of “quality.”

“Stamps of Approval” and “Opportunity”

Go to any of the LinkedIn profiles of entrepreneurs in Bay Area and you see names like Google, eBay, Apple, Yahoo, PayPal, and Facebook littered throughout. It’s easy (and perhaps intellectually lazy) to use those big brand names as a proxy for the quality and potential of these entrepreneurs.

In LA, we don’t see as many entrepreneurs with these types of backgrounds as we do in companies up north. However, it’s a mistake to believe that the lack of these stamps of approval is a sign of anything but the lack of opportunity. We don’t have as many of these signature companies in LA, and so our entrepreneurs often do not have the opportunity to cut their teeth at these more traditional proving grounds. While such an experience would be nice, it certainly is not a pre-requisite. In fact, employees of these huge platform companies often do not know how to growth-hack their way from a standing start; they may be too accustomed to the massive traffic and structural advantages of their previous employers. As a result, we’ve learned to be just as impressed by an entrepreneur who previously launched a chain of Taco stands as we are by an entrepreneur who was formerly the original product manager of Google Maps.

“Ability” vs. “Knowledge”

In the same vein, because not as many entrepreneurs in Los Angeles worked at companies like Google or Facebook, a lot of them have not really gotten the training they need to properly communicate requirements, run a scrum, or conduct A/B testing. Certainly it is a negative to not have acquired the basic skills of product management. However, given some time, coaching, and practice, great entrepreneurs have the innate ability to quickly gain the muscle memory to not just execute and repeat, but also to build and improve.

As VCs, we simply have to understand the risk / reward of these type of investments, and to actually be excited that we can be operationally involved in adding value ourselves.  Having spent the bulk of our careers as entrepreneurs, we relish the opportunity to roll up our sleeves and help.

“Dealflow”

Dealflow in Southern California is much more organic and less efficient.  In Silicon Valley, given how tightly knit the ecosystem has become, and how well-networked entrepreneurs have learned to be, there is almost no such thing as “proprietary” deal flow. The top tier funds see almost all of the best deals.

The best entrepreneurs have been coached to run a tight process, to shop their term sheets to a myriad of VCs, all of whom have great reputations and large networks. In Los Angeles, that network has yet to become as efficient, and the reputational transparency of investors has yet to be cemented. (Not to mention that there are only a handful of active, institutional venture funds based in Los Angeles.)

Furthermore, entrepreneurs don’t necessary build their businesses to be venture-funded. Oftentimes they see a market need and simply want to serve those customers. By the time the venture financing topic is broached, they already have significant traction for their business. In that context, these entrepreneurs have come to look for specific VCs that provide the exact value-add they need.  I regularly come across companies who happen to have the #1 paid app in the App Store fly under the radar for years before raising venture capital.

“Diversity” and “Domain Experience”

While Hollywood dominates in terms of perception and mindshare, in reality, Los Angeles is a middle-market town with significantly more diversity than the Bay Area from an industry perspective. Categories like retail, automotive, logistics, distribution, manufacturing, and many others all play a significant role in employment AND entrepreneurship in Southern California. As technology continues to encroach and disrupt traditional industries, we are seeing an increasingly diverse set of entrepreneurs (especially in B2B categories) tackling industries that very few entrepreneurs in the Bay Area ever think about, given their lack of exposure. While in Silicon Valley entrepreneurs often ideate through a superficial process of derivative “X for Y” concepts (e.g. “Uber for pets”), Los Angeles entrepreneurs often come from a specific industry with deep domain expertise, offering to use technology to solve a huge need with which they have deep, first-hand experience.  It doesn’t take a genius to know which team, with proper resources and guidance, will have a higher likelihood of success.

“Cashflow” vs. “Big Idea”

When I first arrived in LA in 2006, the most common complaint about Los Angeles companies was that they are often more focused on generating cashflow than building long term strategic defensibility and achieving an outsized outcome as a result (arbitrage and domaining are two business models that originated and thrived in LA). Much of this is due to the lack of venture capital – seed-stage venture capital, in particular – to get companies off the ground here in Los Angeles. However, the ambitions of this current generation of Los Angeles entrepreneurs are no longer stunted relative to those in Silicon Valley.

LA is the home of Snapchat, Tinder, and Whisper – social mobile apps swinging for the fences. Likewise for Oculus, pioneering next-generation technologies like virtual reality.  These are businesses aiming for scale and impact, not merely monetization. Los Angeles is also a city of media and brands – industries with which scale and reach are even more critical than even on the Internet.  As these industries continue to cross (or collide?), we will increasingly see the outsized outcomes that VCs require, and along with them, the exponential increase in the ambitions of our entrepreneurs.

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