Explaining Southern California's economy

LA startups: Tech makes all the difference

Gaikai Screen Shot

Gaikai, an L.A.-based gaming startup, just sold to Sony. It was engineering talent that made the company successful.

Nate Redmond, the managing director of L.A.'s Rustic Canyon, an early stage venture capital firm, had a must-read piece at TechCrunch over the weekend. Taking as his jumping-off point Sony’s purchase of of gaming startup Gaikai for $380 million (Rustic Canyon was an investor), he makes a case that something important is happening on the Los Angles startup scene:

LA has once again become a hotbed for technical leadership, as indicated by the flurry of investment activity. Entrepreneurs in the LA region attracted $567 million in venture capital in the first quarter of this year, 50% greater than the NY Metro area in the first quarter of the year, according to PriceWaterhouseCooper’s Money Tree report. Between the outstanding technical talent and the passion and vision of great founders, those dollars are being invested into technology-driven companies that break the stereotype of startups in LA.

Don't get too excited about that "L.A. is beating New York" angle. There's a rivalry building between the first and second largest cities when it comes to which will be the next big tech town, but Silicon Valley still brings in the vast majority of the VC funds: 36 percent in the first quarter of 2012, with around four times as many deals at L.A. In fact, you can put L.A. and NYC together and not even get half the funding levels in the first quarter that Silicon Valley has notched. (This is nothing new, by the way.)

But that's not Redmond's real point. He's more concerned with the part of "technology driven" companies breaking the L.A. "stereotype" — a stereotype that says we don't do true tech in the City of Angels.

Redmond, who joined me last year at SCPR's Crawford Family Forum for a panel about L.A. startups and VC, sees groundbreaking engineering as the factor that separates the men from the boys:

Perhaps we shouldn’t be surprised at the level of technical talent in LA. After all, LA has a deep engineering heritage rooted in the aerospace and defense industries, which for decades sat at the cutting edge of innovation and was a considerable draw for technical talent. 

This theme has been made elsewhere. Union Square Ventures Fred Wilson has become deeply involved in NYU Poly (he's a trustee), seeing it as a way for the New York region to develop its own Stanford — and it's own homegrown engineering talent. 

That's great. But of course L.A. has not shortage of major universities, and both Caltech and UCLA routiney rank at or near the top in the rundowns of engineering programs.

Venture capitalists are increasingly seeing technical talent as a key differentiator, as funding becomes harder to come by and startups need to distinguish themselves from competition much earlier. So it's good that L.A. is catching up in this respect. It has a way to go before it attracts the kind of funding that Silicon Valley is used to. And it might never manage to even things out. But no matter how the money part shakes down, it's the engineers who will lead the region forward.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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