Visitors who come to Los Angeles always complain about the traffic. This makes sense because they do not know how to plan their day and avoid it altogether. We Angelenos do. We spend our days planning meetings around the insane traffic. Traffic exists as a consequence of the success of the city. Think about it. If the city’s traffic decreased to a tolerable level, everyone in the country would move here. It is your guess as to what happens next.
Today Los Angeles has its own Zeitgeist. It is living the dream. It is paradise. Yes, our traffic is among the worst in the country, but our creativity has also ascended to new heights. Yves Saint Laurent worldwide design studio is now in Los Angeles. Why is this important? Well, think about this: A top haute couture designer is creating its collections inspired by the Angeleno culture. Anytime you fire up Instagram and watch cool people hanging out in cool places, you are watching Los Angeles. Kim Kardashian, Kendall and Kylie Jenner, Connor, Captain Sparklez and hundreds more YouTube and reality stars all hanging out in the same city. I know, we get our fair share of LA haters, but, then again, why did our 10M+ population grow by 1.1% last year?
Technology has always been part of the LA story. The first telecommunication satellite; the first email sent out of an office at UCLA; from Internet monetization via pay for click, the brainchild of Bill Gross, to contextual website ads invented by Gil Elbaz, and now ubiquitously used by Google and basically everyone else. Add to this new names such as Snap, Inc. (formerly Snapchat), Dollar Shave Club, The Honest Company, JustFab, MeUndies, etc. Snap, Inc. deserves a special award because it is quite possible it will be our first Internet mega hit. Beyond a unicorn, this one is a dragon and rumored to be going public at a whopping $25B market cap. This Angeleno company is redefining media and with it an entire industry. Welcome to the new capital of social media. Another whale is Riot Games, which publishes League of Legends, the largest game in the world, and has by itself created eSports, a new category of its own with dreams of becoming bigger than the NFL. Activision Blizzard (of which I am the co-founder) is second in this tsunami with Call of Duty and many more titles. Welcome to the new capital of electronic sports. Oh and I forgot, we now have our own NFL team working its way into a $2.5B stadium. The old meets the new. Welcome back the LA Rams after 32 years. We did not just wait, we founded a new industry.
“Technology has always been part of the LA story. The first telecommunication satellite; the first email sent out of an office at UCLA; from Internet monetization via pay for click, the brainchild of Bill Gross, to contextual website ads invented by Gil Elbaz.”
The Great LA Financial Disappearing Act
Los Angeles has a new best friend. Capital. One of the biggest complaints you hear in Silicon Beach is about the dearth of available venture capital in our city. Yes, venture capitalists have flown on Southwest to come in and write checks to Snap Inc., Dollar Shave Club, and The Honest Company; however, they are not coming on strong. It is merely a trickle. Given the size of Los Angeles and its diverse cultures and creativity, you would think more would want to invest in our city. Well, we have news for these Sand Hill folks who would rather fly private to Hawaii than Southwest to Burbank: competition has just arrived. Let’s actually be a little more brutal and honest than that. The status quo is no longer acceptable and investing in white Stanford graduate males is just not interesting anymore. The crowd is going to replace you the venture capitalist and use their immense wisdom to decide who gets to raise capital. This may sound crazy, but it is not. The democratization of capital is going to start right here and right now in LA.
It is interesting to know that in the ’80s, Los Angeles had a thriving capital markets community. We had brokerage houses, banks, and bankers all headquartered here. The Financial District, also sometimes called Wall Street of the West, held corporate headquarters for Bank of America, Farmers, Merchants Bank, the Crocker National Bank, California Bank & Trust, and International Savings & Exchange Bank. The Los Angeles Stock Exchange was also located in downtown from 1929 until 1986. The ’80s were good to Los Angeles and capital was plentiful. It is hard to pinpoint exactly what happened, but seminal events such as the bankruptcy of Drexel Burnham Lambert, which although it was technically headquartered in New York, was led by Michael Milken in Beverly Hills who singlehandedly created the junk bond market and was responsible for raising capital for hundreds of firms including Turner Broadcasting and Golden Nugget Resorts. This innovation in capital formation was born right here in LA and even though Drexel was liquidated in the early 1990s, the impact it had on how companies raised capital is enormous. Banks and brokerage firms were purchased and merged into national conglomerates and local capital just went down the drain. This happened all over the country, of course, not just in Los Angeles. Consolidation in multiple industries spurred by innovative financing techniques led to the big companies getting bigger and centralizing operations. Combined with the trend towards global outsourcing, a number of once vibrant business communities found themselves struggling. To compete in this brave new world of limited access to funding, startups were forced to adapt or die.
Jump from the 1990s to today and we are about to see a brand new capital formation industry created in Los Angeles make its mark, signifying the return of capital creation in a form that is something completely different. In April 2012, Obama signed the JOBS Act and no one really noticed. It is probably going to be the most important bill he signed and not the controversial Obamacare. Why am I saying this? Entrepreneurship is probably the most important part of our economy – always was and still is. However, during the 2007 Great Recession the number of new companies formed shrunk and the amount of money invested by venture capital firms imploded. It took a few years for our economy to recover but even today we see fewer companies being formed every year than prior to 2007. What gives? It is simply access to capital. We cannot downplay the importance capital offers to building companies and creating new jobs.
The JOBS Act has two very important rules: the first one is the Regulation A+ which is a revival of an old rule which was not used anymore. This new facelift is important. Companies can now raise up to $50M directly from the general public without using a broker dealer or any investment bank. This new rule, as I dub it, the Online Public Offering (OPO), is experiencing tremendous growth with companies raising millions in capital. This rule eliminates the expensive and often impractical costs of raising money from the public. The Blue Sky rules, which require companies to register in every state where they intend to offer shares, is eliminated. The requirement to use a broker dealer to sell the shares is eliminated. This is truly revolutionary. The only downside is companies need to stomach around $100,000 in costs to pay lawyers and CPAs and wait 3 months for the SEC to qualify the offering. However, the gift just keeps giving with the second important rule called Regulation Crowdfunding, which allows companies to raise $1M directly from the general public; and this time costs are in the thousands with virtually no delay in launching the offering. Since last May, 42 companies have collectively raised over $10M, and this is just the beginning. OPOs have raised over $100M since June of 2015 when this all started.
LA Is the Crowd Whisperer
The crucial insight behind the adoption of the JOBS Act is that the power of the crowd can enable non-wealthy investors to turn the tables and invest on an even footing with wealthy “accredited” investors, who in the past were, by and large, the only ones able to take advantage of opportunities to invest in promising startups. In the rules for Regulation CF, the collective “wisdom of the crowd” is cited as the means by which a large number of investors can decide if they want to make relatively small contributions to fund a company. In statistics, the value of increasing the amount of inputs to improve the accuracy of a calculation derived from a set of data is well-appreciated. The same principle underlies the power of crowdfunding, enabling a large number of non-accredited investors to benefit from pooling their collective knowledge together when it comes to making decisions about which OPOs are deserving of funding.
Los Angeles is going to play a pivotal role in the new Online Public Offering industry, with firms such as Crowdfunder, Flashfunders, and StartEngine (of which I am the CEO) helping dozens and soon hundreds of companies raise the capital they need. Los Angeles is the right town for OPOs because they require marketing in order to generate interest among potential investors from the general public. Remember, there are no brokers involved. Imagine selling a house without a real estate broker. This is exactly that. Companies sell shares directly and without any intermediaries. However, this means they need to market themselves. Good news is that in Los Angeles there is no lack of video production firms, social media marketing agencies, online marketing platforms, and influencers. Talking about influencers is important because most YouTube stars live in Los Angeles. This includes Captain Sparklez (a co-founder with me at XREAL), Michelle Pham, and of course the Kardashians. These influencers can make a crowdfunding campaign go viral. This means they can help raise capital for companies. This makes Los Angeles the go-to town to raise money. It will be easier to raise money here than in Duluth, Georgia or Ann Arbor, Michigan. My point is the new way to raise capital is to do it through marketing and social media and this is today a forte of the town of Los Angeles.
“Los Angeles is going to play a pivotal role in the new Online Public Offering industry, with firms such as Crowdfunder, Flashfunders, and StartEngine (of which I am the CEO) helping dozens and soon hundreds of companies raise the capital they need.”
Fashion, brands, social media, technology, space, transportation – we have it all. This kind of leadership does not exist elsewhere. This is why LA is flying higher than any other city. The crowdfunding revolution can help it fly higher still.