Explaining Southern California's economy

The Future of Wealth in LA: Entrepreneurship is the name of the game

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The California Community Foundation has released a new study, "The Future of Philanthropy in L.A.: A Wealth of Opportunity." My KPCC business vertical colleague Brian Watt will have a report on air later that you can listen to, and I'm going to provide a bit on insight in the overall trend of wealth formation and transfer in the LA area.

The numbers are far from trivial: "Despite the recession, Los Angeles County residents have an estimated net worth of almost $1.3 trillion." Just to put that in perspective, the entire annual GDP of the United States is about $14.5 trillion. What's truly staggering, however, is how much of this money will transferred generationally: the RUPRI Center estimates $1.4 trillion by 2060 — a huge increase over 2020's projected $114 billion.

What's truly fascinating about these numbers is where the wealth is coming from. According to the report, "LA's growing and future wealth will be driven by entrepreneurs, especially immigrant entrepreneurs." 

It's trendy right now to look at the U.S. economy, ask how it's going to fix itself after the financial crisis, and nominate entrepreneurs as the saviors. We love our innovators in America, and these days what we really love are "disruptive" innovators — those brave visionaries who, to steal the famous Apple tagline, "think different" and periodically reinvent the economy.

Often, however, it's easier to talk the innovation talk than it is to walk the innovation walk. Except, the data shows, in LA. The city is a magnet for entrepreneurs. And not just any entrepreneurs. In terms of entrepreneurship, we get the cream of the crop: highly educated immigrants with a high net-worth who are attracted to the region's colleges and universities; the relatively stable U.S. economy; our proximity to the Pacific Rim; and perhaps most importantly, our numerous clusters of immigrant communities that are expanding and thriving.

It remains to be seen whether this fertile ground for entrepreneurship will affect a larger trend in the country and the region: the increasing concentration of wealth. LA county mirrors the nation on this one. More than a third of the county's household have either no net worth or a negative net worth, but a mere 0.6 percent or households owns nearly a third of the wealth, currently $21 million on average per home.

It's possible that a vigorous level of entrepreneurial activity will provide the business opportunities that will enable the formation of new, innovation-driven middle class in LA Country. No other U.S. city is as entrepreneurial as LA — among the 15 largest, we're number one, according to the report. And entrepreneurs as a whole create more wealth than non-entrepreneurs. A lot more: $2 million per entrepreneur, versus less than $400,000 for non-entrepreneurs.

The CCF report concentrates on philanthropy and the need for nonprofit organizations to properly prepare themselves to benefit from this impending growth and transfer of wealth.

But the business community also needs to get ready. Some of that wealth will also be available for investment. At a panel on venture capital in Southern California that I moderated at KPCC's Crawford Family Forum last night, one of the things we discussed was the lack of a really strong angel investment community in the region. 

Angels are often high net worth individuals who choose to deploy their money to create and support new businesses. With such significant new wealth creation expected to emerge in LA County in the coming decades, we may be able look forward to the angel problem solving itself.

Over the next few days, I'll be digging deeper into the CCF report. There's some really juicy data in it, as well as some revelations about how we can "map" the future of wealth, entrepreneurship, and philanthropy in the region. It's not what you might expect. In fact, I'd say it's...disruptive.

Follow Matthew DeBord and the DeBord Report on Twitter.

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