$811M funding record for LA tech in the 3rd quarter of 2014

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The good news isn't stopping for Los Angeles tech. In the third quarter of 2014, Los Angeles digital tech startups raised more than they ever have, totaling $811 million in funding. They also exited to quite a nice tune, selling off for a total of $2.417 billion. All in all, 51 companies received funding and six exited via acquisitions.

 

That increased funding is no doubt because outsiders are seeing the potential of LA startups more and more. Just this week PayPal co-founder Peter Thiel called LA tech the most “underestimated" region in the country. Thiel said to the LA Times: "I'd definitely be short New York and long L.A." 

 

Beyond the hype, LA tech is proving to be a consistent producer of certain types of startups. A couple of themes that were prevalent in LA in recent years showed up again this quarter. Los Angeles is known the world over for its media prowess and a healthy number of media startups received funding. LA is also known for its branding ability and that shined through in several well-branded e-commerce companies that received investments.

 

If there was one caveat to the 3rd quarter’s record funding total it would be that a large portion came from fundraising done by Privlo, an online home loan company. Privlo raised a $350 million debt round to finance the loans it is issuing. That huge number is not typical for a tech startup, so it skewed the numbers a bit. Still, when Privlo’s debt round is excluded, Q3 2014 is the second highest total raised by LA tech companies in the last two years.

 

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With Hollywood located nearby, it is no wonder Los Angeles has a host of well-funded media startups. Four of the seven media companies funded in Q3 where built around YouTube, showing that site’s continued importance in the LA tech community. Those companies included: Zefr raised $887,000 to focus on technology that analyzes YouTube videos; BeautyCon raised $2 million to further brand endorsements for its YouTube fashion stars; Kin Community raised $12 million to expand its female focused YouTube MCN; and All Def Digital, which was started by Russell Simmons, raised $5 million to build an African American focused MCN.

 

All of these funding rounds come after several huge quarters for YouTube MCNs. In March, Maker Studios sold to Disney for $500 million. Also, in March Machinima received $18 million via a deal led by Warner Brothers. And last April, MCN AwesomenessTV (owned by Dreamworks) acquired Big Frame for $15 million.  The YouTube churning continues… 

 

 

E-commerce companies in Los Angeles also continue to do well. Six e-commerce companies raised funds last quarter. Most prominent were JustFab, a monthly clothing subscription service, which raised $85 million; The Honest Company, a baby and child product subscription service, which raised $70 million; and Dollar Shave Club, a razor subscription service, which raised $50 million.

 

These companies have all matured to a point where they have a huge numbers of subscribers. At the end of 2013, JustFab boasted 1.5 million subscribers and as of September 2014 Dollar Shave Club had about 1 million subscribers. The Honest Company hasn’t disclosed a subscriber count, but it gets about 80 percent of its revenue from subscribers.

 

Large subscriber counts also mean large revenues. JustFab said it is on track to earn $400 million in revenue in 2014. Dollar Shave Club said it is on track to earn $60 million. The Honest Company and JustFab are each valued at about $1 billion, and have indicated interest in a future IPO.

 

All three e-commerce startups rely heavily on their brands to sell. JustFab often leans on the celebrity of its stakeholders, including president & creative director Kimora Lee Simmons, and Kim Kardashian and Kate Hudson who are also stakeholders in the company, as their startups, ShoeDazzle and Fabletics merged with JustFab in 2013. The Honest Company is known for its co-founder actress Jessica Alba. Dollar Shave Club is known for its lead personality, CEO Michael Dubin, whose walking monologues have been key to that company’s viral marketing videos.

 

With Amazon bound to win the efficiency and delivery speed game, the only way to win at e-commerce is to offer an exclusive product and unique brand. These three Los Angeles companies have done that, and it is benefiting them tremendously. Secondly, the subscription model these companies are all based around is an enticing way to generate reoccurring cash flow. Historically, retail revenue is a rollercoaster ride, peaking around the Thanksgiving-Christmas holidays and all but grinding to a halt at other times during the year. The online subscription model is an attractive alternative to that kind of inconsistency. 

 

In addition to e-commerce companies, several other LA startups received large funding rounds: ZipRecruiter raised $63 million to capture the market for small business hiring; Telesign raised $49.4 million to make up to three acquisitions of authentication and verification service companies; and NantMobile stealthily raised $30 million to continue its work on augmented reality.

 

Two valet apps received funding: Park Engine raised $200,000 and Curb Stand raised $2 million.

 

Two bitcoin development platforms received funding: Gem raised $2 million, and Chain received $9.5 million.

 

Online mortgage lender Privlo received $3.8 million for equity sales, then fueled up with a $350 million debt round. The debt is to finance its lending operations. Also, in real estate, Asset Avenue raised $3 million to kick-start its real estate loan crowdfunding platform.

 

Exits in LA this last quarter were led by the massive $2.3 billion sale of Conversant. The Westlake Village-based ad tech company, was bought by Alliance Data for cash and stock. Formerly, known as ValueClick, Conversant is a digital buy side advertising network.

 

Following that purchase the next largest disclosed acquisition was Glu Games' purchase of Long Beach-based Cie Games for $100 million. Cie Games is known for its success with two racing games: Car Town Streets and Racing Rivals. Cie Games co-founder Justin Choi, has also founded and is currently CEO of native advertising platform Nativo.

 

Two Los Angeles companies also became one last quarter when Saatchi Art was acquired by Demand Media for $17 million. As part of the deal Saatchi Art's CEO Sean Moriarty became the CEO of Demand Media.