The LA Discount

Why are Los Angeles tech startups valued at a discount in comparison to startups in Silicon Valley, New York, and other cities?

For example, LA startups graduating from accelerators are receiving convertible notes ranging between $1mm-5mm cap with a discount of 10 to 20 percent, while Silicon Valley startups are receiving convertible notes at $8 million to 12 million with no discounts.

Let’s look at the factors to why we question LA startups being valued at a discount:

LA is an emerging top tech city. According to a recent study, the Startup Genome, LA is listed #6 in the world for startup ecosystems, based on average throughput, behind #5 Tel Aviv, #4 Toronto, #3, London, #2 New York, and #1 Silicon Valley.

Established Startup Accelerator/Incubator Ecosystem.  LA is home to 8 accelerators/incubators: StartEngine (which I co-chair), Muckerlab, Amplify, Idealab, UpstartLA, Science, LaunchpadLA and Originate. This year, close to 100 of these startups originated from these accelerators/incubators.

Top Universities. Located in LA’s backyard are the nation’s consistently top highly ranked engineering and business schools: USC, UCLA, Cal Tech, Cal Poly and Harvey Mudd. Venture outside of LA’s metropolitan area and you have UC Irvine.

Celebrity Marketing. Undoubtedly, LA is the mecca entertainment capital of the world, which makes the city great for the music, movies, TV, and fashion industries. This provides LA an additional advantage and the accessibility to leverage celebrities for marketing, especially with the largest entertainment management agencies based here. There is no other city that has all of these industries on a large scale right in its own backyard. The expertise and experience in entertainment reside here.

Diversity.   LA country is the second largest in the nation with a population of close to 10mm and will continue to grow as new residents continue to be attracted by its ideal year round sunny weather, lifestyle, a huge diversity of ethnic backgrounds and industries: media, music, fashion, entertainment, international trade and defense.

LA Successes. Yes, we know that Silicon Valley has its behemoths such as Facebook, Apple, and Google and New York has Kickstarter, Meetup and Fab, but let’s not forget LA’s own success stories, Activision (I am the co-founder) in particular.

Activision is one of the true stories of LA beating Silicon Valley in its own “game.” Activision was initially founded in 1976 in Mountain View, went into bankruptcy in the late 1991, was then re-founded and brought to LA in 1992 and now a $14B market cap Fortune 500 company.

Emerging Companies. LA’s tech ecosystem include upcoming and newly established companies such as BeachMint, Honest.com, DocStoc, CityGrid, LegalZoom and Demand Media. LA is also home to the top producers of YouTube content- Maker Studios and Machinima. You say that LA needs an Amazon behemoth also? Look up NewEgg (based in the outskirts of LA), a giant marketplace for computer hardware, which surpassed $2.5B in sales in 2010.

Investors/Entrepreneurs. LA has its share of billionaires, notably Elon Musk, co-founder of PayPal, SpaceX and Tesla; and Dr. Patrick Soon-Shiong, surgeon, philanthropist, and founder of NantWorks. In fact, the majority of wealth in LA comes from entrepreneurs. If you combine the local VCs, Angel investors, and the trend of celebrities turning Angel investor, startup capital is plentiful.

With all the factors that make LA’s tech startup ecosystem ideal, the question still is - Why are LA’s startup valuations discounted in comparison to others in SV and NY, as much as 50 percent?

We would like to invite our readers to comment .

Howard Marks is co-chair of StartEngine and co-founder of Activision, and is a serial entrepreneur.

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