How startups learned to love L.A.

Twelve years ago, Katerina Schneider skipped out on tech job offers from Silicon Valley and New York City. Instead she went for a role in Lehman Brothers’ gaming group in Los Angeles that eventually led her into the music business. 

It was during those years, working closely with music moguls Lucian Grainge of Universal Music Group and Atom Factory’s Troy Carter, that Schneider learned the two lessons she needed to eventually found her own company: How to hustle, and how to tell stories about people and products. “It’s an interesting breeding ground for entrepreneurship,” she said. “That grittiness, it’s so apparent here.”

It makes sense, then, that Schneider picked L.A. to found a startup of her own ?— Ritual, a health tech company that makes vitamins for women and has raised $40 million in funding. 

Ritual is one of six companies on this year’s LinkedIn Top Startups list based in Los Angeles, making it the third most popular region for the list’s 50 startups, after the San Francisco Bay Area and New York. L.A.-based firms on this year’s list also include cannabis maker Dosist, Khloe Kardashian’s Good American size-inclusive apparel line, scooter firm Bird, media planning agency Giant Spoon and LeBron James’ Uninterrupted media network.

The Los Angeles of today isn’t just Hollywood and aerospace. All of the FAANG companies — Facebook, Amazon, Apple, Netflix, and Google — have set up offices there. Silicon Beach, a startup hub located in a stretch of coastal cities, is home to hundreds of startups. Venture capitalists pumped $6 billion into local startups in 2018. And some of the most high-profile exits (Dollar Shave Club, Ring and Snap) in the last decade have hailed from the City of Angels. 

It’s even gotten to the point that city officials and even some tech leaders are growing concerned about how the explosive growth may affect the deeply diverse city. 

If American cities are competing to become the next “Silicon” leader, L.A. is the clear frontrunner. It already possesses several critical ingredients to claim the title. 

L.A. is more affordable than the Bay Area or New York. Its universities graduate more engineers than any other region in the U.S. It’s widely considered to be the creative capital of the U.S., with budding writers, actors, and musicians flocking to the city in search of their big breaks. And its ports and manufacturing muscle — until the 1970s, L.A. produced more cars than anyone but Detroit — means it’s ideal for direct-to-consumer or fashion brands. (Plus, that weather…)

In many ways, the startups on the LinkedIn Top Startups list are reflective of its existing business strengths. The companies cover everything from transportation to entertainment, from fashion to wellness.

This blend of diversity is new to L.A. It wasn’t too long ago that the city’s tech sector was anchored to aerospace, manufacturing, and entertainment. In the 2000s, some of the city’s best-known tech companies were fellow attention-economy firms like Activision Blizzard, Hulu, and Myspace. But in 2011 things began to change. That year, Snap launched out of Santa Monica (CEO Evan Spiegel grew up in L.A.), and five incubators —Amplify LA, Launchpad LA, Mucker Capital, Science, and StartEngine — opened their doors. 

When angel investor Peter Pham returned to L.A. that year to co-found Science, he faced skepticism. “People thought I was insane,” he said. “But you could start a consumer company down here and get an exit.”

Today, entrepreneurs of every stripe can justify their choice of headquarters. In 2018, L.A. startups lured $6 billion in venture capital — the highest dollar amount flowing to Los Angeles since the height of the dot-com bubble in 2000, according to CB Insights and PwC. An increasing number of investors are setting up funds in L.A., joining longtime players like Crosscut Ventures and Upfront Ventures. In addition to more established startups like The Honest Company and Tinder, A-list tech players like Amazon and Netflix are leasing millions of square feet of office space in Silicon Beach and also in cities east of the 405 freeway like Culver City and Hollywood. 

Los Angeles has even begun to woo engineering talent away from the epicenter of all things tech in the U.S. — the San Francisco Bay Area. Over the past four years, L.A. has gained more than 4,600 workers from the Bay Area who listed key engineering skills like artificial intelligence and computer hardware on their LinkedIn profiles, according to LinkedIn’s Economic Graph Research & Insights team. And the number of software developers who previously lived in San Francisco and now call L.A. home jumped by 11% between 2016 and 2018. 

L.A. is also, in some ways, a kinder, gentler place for entrepreneurs, at least compared to Silicon Valley. The vibe is less “if you didn’t raise $100 million yet, then I won’t talk to you” and more “if we help all of our startups that we know, it will just help grow the ecosystem,” said Nanxi Liu, co-founder and CEO of digital display software startup Enplug. “People are still helpful.”

Exits are also growing, both in the name recognition of the buyer and the price those buyers are willing to pay. Apple spent $3 billion in 2014 to buy Beats Electronics. Two years later, Dollar Shave Club went for $1 billion to Unilever. Meditation app Headspace has raised $75 million. And investors have given $273 million to Bird, the scooter firm that put “micro-mobility” on the map. 

In fact, Bird’s origin story is largely thanks to that uniquely Los Angeles challenge—unrelenting traffic. Travis VanderZanden, Bird’s founder and CEO, credits the region’s stop-and-go freeways as fuel for the rationale behind Bird. “He landed on launching Bird in the city many view as the epicenter of all things traffic, congestion, and poor air quality,” a spokeswoman said. “He was determined that if he could get Angelenos out of their cars, he could get anyone to do so.”

Despite all the impressive developments, Los Angeles’ ascent into a global tech powerhouse is anything but guaranteed. 

In other major metropolitan areas, funding often comes at least in part from local venture capitalists. In L.A., roughly 85% of the $42.2 billion in venture capital raised by local startups since 2010 has come from outside of the region, according to Pitchbook. That's the highest percentage of outside capital among some of the country’s major tech hubs, which also includes Boston and New York. 

For founders looking for funding, that translates to a lot of 80-minute flights up the coast on one of the 30-plus flights between Bay Area and Los Angeles area airports that operate every day. Earlier this summer, Jason Calacanis, a former L.A.-based angel investor who moved to the Bay Area a few years ago, took to Instagram to sum up L.A.’s fatal flaw. “I love LA,” he wrote. “...a better city than the dysfunctional SF. If only it had the deal flow.”

Early career workers may find that because the tech scene is less mature than San Francisco or Seattle, there are fewer opportunities, and they often must leave L.A. to get their careers off the ground, said William Larsen, a staff interaction designer at Google and former adjunct faculty at California State University in Long Beach. At the same time, the more senior workers who move to L.A. sometimes discover that they are limited by job opportunities at their level because the industry is so much smaller than it is in the Bay Area. 

“For what is happening, there is a brain drain,” Larsen said. 

Another hitch? The cost of living. Housing in L.A. may be cheaper than San Francisco or New York, but that’s not saying much. In Los Angeles, the median rent for a two-bedroom apartment is $1,760, according to Apartment List. In San Francisco, it’s $3,130. Those are both significantly higher than the national average of $1,191.  

“As a startup, it’s really hard to survive sometimes because the cost of living is so expensive,” said Cara Lunsford, who founded nurse-recruiting startup HolliBlu.

While cheaper than San Francisco, L.A. is still among the top 10 most expensive housing markets in the U.S. And a growing portion of people are expressing their displeasure with their feet. Between 2017 and 2018, nearly 100,000 people left Los Angeles County, the biggest regional net loss in the U.S., and the overall population in L.A. County fell by 13,000 people, according to U.S. Census Bureau data. 

To stem the damage before it gets worse, city officials as well as some tech firms, startups, and investors are now trying to figure out how to preserve the lifestyle, comparative affordability, and diversity that have served as some of the region’s biggest draws.

L.A.’s talent pool is diverse — about 35% of its residents were born outside the U.S. — which is something that founders say they are excited about. 

And yet L.A.’s tech sector doesn’t reflect that diversity. About 75% of local residents identify as a person of color, but only 2% of venture capital partners in L.A. identify as Black or Latino, according to Pledge LA, an initiative launched by Mayor Eric Garcetti’s office, the Annenberg Foundation, and some tech firms and venture capitalists.

Pledge LA is tracking the diversity of the local investor and tech workforce, as well as civic engagement among those workers. Their hope? To prevent Los Angeles from turning into another San Francisco, which has seen low and middle-income workers priced out of their communities as higher-paid tech workers have moved into the city. 

An official in the mayor’s office described the challenge: “As the tech industry grows, how do we engage the community and make them part of the growth story?”

What’s your take on this trend? What qualities make for a great startup city? Share your thoughts in the comments, using #LinkedInTopStartups.

*An earlier version of this article misspelled Cara Lunsford's last name. It has been updated.