Weekly Report – October 26, 2015
City National Bank
Venture Capital Report – Los Angeles
Third Quarter 2015
Venture capital investments in Los Angeles County surged in the third quarter, bucking a downtrend in Silicon Valley to the north.
And on paper at least, the list of businesses attracting the most cash reads like classic L.A.: organic products, self-produced videos, real estate and a meditation app.
VC firms invested a total of $581 million in L.A. County companies in the third quarter, up 51% from $386 million in the second quarter and nearly double the amount in the third quarter of 2014, according to data firm CB Insights. The number of companies funded totaled 38 last quarter, down 7% from the second quarter but up 19% from a year earlier.
By contrast, VC investments in Silicon Valley slowed to $6.93 billion last quarter from $9.32 billion in the second quarter. New York City also saw a modest pullback in funding.
L.A. County’s venture capital investment total in the quarter was bigger than the amounts received by most states, including Florida ($480 million), Illinois ($477 million) and Texas ($462 million).
Of the 10 largest L.A. venture deals last quarter, eight were early-stage financings, meaning Series A or B. “That tells you that VC firms are willing to take a chance on some of the region’s freshest business ideas,” said Billy O’Grady, Southwest market manager for City National’s Technology Group.
L.A.’s summer funding rush was led by Honest Co., the Santa Monica firm that actress Jessica Alba created in 2011 to sell eco-friendly baby products, cosmetics and other merchandise online. The company picked up its fourth round of VC funding last quarter, totaling $100 million. Alba now is testing the brick-and-mortar format with a new pop-up store at L.A.’s Grove shopping center.
Another eco-friendly L.A. business got its first venture money last quarter: Thrive Market, which sells natural and organic products online via a membership system, took in $33 million in Series A funding. The Culver City-based company launched one year ago under CEO Gunnar Lovelace, who has founded several other tech and eco-oriented businesses.
L.A.’s second-biggest VC deal last quarter was a $70 million Series B infusion for Flipagram, an app that allows users to create short online videos using their favorite photos and music. The two-year-old Rolling Hills Estates firm has attracted millions of fans and some tech heavy-hitters: Silicon Valley VC legend John Doerr sits on Flipagram’s board.
Realty Mogul, a two-year-old West L.A. company, nabbed $35 million in Series B funding. The company is a crowdfunding marketplace for real estate, connecting investors (minimum: $5,000) with property owners and borrowers.
On L.A.’s Silicon Beach, Headspace received its first venture infusion, totaling $34 million. The five-year-old Venice company produces online guided meditation sessions and “mindfulness training” exercises. The business is the brainchild of Andy Puddicombe, a former Buddhist monk.
EQUITY FINANCINGS FOR LOS ANGELES COUNTY VENTURE-BACKED COMPANIES*
| 3 Q 2015 | 2 Q 2015 | 1 Q 2015 | 4 Q 2014 | 3 Q 2014 | |
| Number of Financing Deals | 38 | 41 | 28 | 32 | 32 |
| Amount Invested ($MM) | $580.96 | $386.4 | $220.3 | $755.7 | $312.7 |
Additional Information from a Recent L.A. Times Piece
- Venture capitalists spread $16.3 billion over more than 1,000 technology, media, healthcare and other companies in the U.S. from July through September, driving a seventh straight huge quarter for start-up investment.
- Barring a collapse in investing this fall, 2015 would mark the biggest year nationally and in Southern California for venture capital investment other than 2000 — when the dot-com boom reached a peak, according to the MoneyTree Report released last week by consulting giant PwC, the National Venture Capital Assn. and Thomson Reuters.
- But the rosy figures come alongside worrying trends for entrepreneurs and investors. Bets are increasingly concentrating on fewer companies, many of them older. Compared with the last seven quarters, July through September ranked second for amount of cash invested but ranked fifth for number of investments.
- Investors are paying higher prices sooner in a company’s life than they traditionally have. The median valuation of companies before new investments nearly doubled to more than $68 million over the summer from $36 million in last year’s third quarter, according to Dow Jones VentureSource.
- Some venture capitalists are sounding off at the rise of private companies valued at more than $1 billion, a figure that’s become a badge of honor. Higher valuations and delayed sell-offs could result in company founders seeing bigger financial gains when they go public.
- Experts see other consequences too. The decline in “exits” out of start-up mode, and the rise in so-called megadeals — or financings of more than $100 million — are causing early-stage investment to represent a narrower slice of all fundraisings. The big, late-stage deals reached a new high point at 6% of all deals this summer, according to tracking firm CB Insights.
- In a recent report, PitchBook said that a “disproportionate share” of money was going to late-stage companies, a trend that it called “alarming.”
- That could signal a peak in the investment cycle, especially if early stage investing is falling off considerably.
- By several accounts, the number of companies receiving checks for the first time is falling as wealthy individuals who tend to be the first investors in start-ups exercise more caution.
- Still, some start-ups are having little troubling raising cash. First-time entrepreneur David Adams raised a total of more than $12 million in the last year for HomeSuite, a Palo Alto company, to expand to Los Angeles and New York City. The business acts as an online brokerage for renting furnished apartments by the month.
- Other entrepreneurs who have seized on the upswing in venture capital investment also feel confident. Culver City-based restaurant chain Tender Greens launched in 2006 with a corporate name TYP Restaurant Group, short for 10-year plan. This summer, the company met its goal of generating a return within 10 years for friends, family and customers who invested early.
