Start-up funds rushing into the region

More investors are competing to fund Southland firms amid a big turnaround.

Sean Percival, a former vice president of Beverly Hills-based Myspace, fled to San Francisco in 2013 because he couldn’t find money in Los Angeles for his start-up.

When he got there, the start-up market in Los Angeles began to boom.

“Literally, the quarter I left, venture capital money coming in to L.A. was huge,” he said.

Now, as a Silicon Valley venture capitalist, a turnaround in the Los Angeles start-up market presents a new challenge: More investors are competing with his firm to fund new Southland start-ups.

Start-up investments in the Los Angeles area rose 25%, to $2 billion, from 2013 to 2014, researcher CB Insights and venture capital firm Upfront Ventures said in a report last month. The study also examined the New York region, a tech hot spot for years, which grew 50% to $4.5 billion in investments last year. Silicon Valley was not included.

Start-ups represent a small percentage of the high-tech economy. But they represent the potential for an economy’s future growth. Venice-based Snapchat started with a handful of employees in a beachside bungalow. Now it has more than 330 across several cities, and with a reputed market value north of $15 billion jobs are bound to grow.

“The momentum that’s been built over the last five years just shows the future is bright in Los Angeles,” said Billy O’Grady, the Southwest market manager for tech banking at City National Bank. “The better we can make L.A. tech, the better we will all be.”

The L.A. market is so hot that start-ups are commanding more money at higher valuations, leaving fewer dollars to be spread around and causing a decline in the overall number of deals. More than 1,000 startups in Los Angeles or Orange counties have received capital since 2010, according to several estimates.

The decrease in the number of deals is a potential sign that the venture capital cycle is near a peak. A steep downturn could follow. But Percival says Los Angeles has developed a strong start-up culture and a financial infrastructure to match.

“In terms of pecking order, L.A. is becoming No. 2 to Silicon Valley in quality of deals, in quality of founders,” Percival said.

Hollywood makes the area a natural fit for new digital entertainment and marketing technologies, Percival said. San Francisco has become so high-priced, for both office and residential space, Los Angeles seems like a bargain to other startups, eager to preserve cash.

Percival is a partner at venture firm 500 Startups, and even though it’s based in Mountain View it has made the most early-stage “seed” investments in Los Angeles since 2009, CB Insights said. Investments include online catering service Chewse, online shopping marketplace Greentoe and fake phone number app Burner.

Percival would love to cycle more Los Angeles startups through 500 Startups’ mentorship program in Silicon Valley, but with money and support widely available in L.A., he knows few of them will go that route.