The diverse economy of Los Angeles provides many great business opportunities, but not without an array of challenges. Here's how to get started.
When Brian Pettigrew sent a job offer to a recent recruit from the East Coast, he included an unusual guarantee at the bottom of the e-mail: at least seven months of blue skies.
"I was being funny, but at the same time, this is one of the biggest benefits of being based in L.A.," says the VP of Operations for The Visionaire Group, a digital creative agency that does promotions for the movie industry. "I told him that this is the kind of weather you go on vacation to get."
Great weather and Hollywood are two of L.A.'s biggest draws, but for entrepreneurs in the nation's second largest city, there's more than meets the eye. The Visionaire Group is just one of a new breed of innovative digital media companies that are thriving in Los Angeles. "The great thing about being in L.A. during the recession is that studios keep putting out movies," Pettigrew says.
The good times don't stop on the red carpet: The $830 billion economy of the Los Angeles metro area is chock full of opportunities for the entrepreneur. The traffic on the 405 Freeway at rush hour, however, is an indication that you're probably not the first to realize the advantages of doing business in Los Angeles.
Despite the competition, there's still plenty of room for new companies to thrive in Los Angeles. We talked to successful L.A. entrepreneurs to figure the best way to start a business in the land of the rich and famous. Here's how to get started.
Starting a Business in Los Angeles: Do Your Research
The business ecosystem of the Los Angeles metro area is as diverse as you'd expect from the nation's second most populous city. L.A.'s gross metropolitan product in 2008 was $831 billion, which places the metro area as the third largest economic center in the world. But before you jump into a business opportunity in Los Angeles (or any city, really), you should be armed with a knowledge of what industries are thriving there.
The entertainment industry — movies, television, music, and gaming — is the city's claim to fame and arguably still its most prominent industry. But L.A. is also home to a burgeoning technology industry. That hasn't always been the case. "In 2000, the tech companies coming out of L.A. were a joke," says Francisco Dao, president of The Killer Pitch, a Public Relations firm based in Tarzana, California. Dao also organizes the Los Angeles technology conference Twiistup. "It was just laughable."
Fast forward 10 years, and Los Angeles has become one of the leaders in the digital media industry, says Mark Suster, a Los Angeles entrepreneur, venture capitalist at GRP Partners, and organizer of Launchpad L.A., a program to mentor start-up CEOs. "The first phase of the Internet is about building infrastructure," he says. "All those successes came from Silicon Valley. Now, the next phase is about content. People on the internet are going there to be entertained. That's where L.A. is uniquely positioned."
A number of successful companies that have also seen successful exits helped propel the thriving digital media and technology industry in Los Angeles, starting with Myspace, which is headquartered in Beverly Hills. Others include Lowermybills.com, Overture, and AOL. Demand Media and Hulu are two of the largest players today.
Other strong L.A. industries to build a business in or around include the textiles and garments industry, the fashion industry, the auto industry (Honda's North American headquarters are located in the Los Angeles suburb of Torrance), the defense industry, and the advertising industry. International trade is also significant — the port of Los Angeles and Long Beach is one of the busiest in the world.
Dig Deeper: Top L.A. businesses from the Inc. 5000
Starting a Business in Los Angeles: Scout a Location
Now that you're more familiar with the local economy, the next step is to take out a map and get your bearings. The first thing you'll notice is that Los Angeles is a sprawling metropolis (the inspiration for the term urban sprawl, in fact), which can make deciding on a location a more difficult endeavor than meets the eye. Unlike more traditional cities, downtown is most often not the most central location.
The good news is you've already picked an industry, so you can look to a few big hubs for each. Start-ups, especially technology and media firms, tend to be clustered in Santa Monica and neighboring areas on the West Side of Los Angeles, says Tyler Koblasa, a Los Angeles entrepreneur and organizer of Start-Up Weekend L.A. and Start-Up Nights, programs to create a community of Los Angeles entrepreneurs. Another, smaller, tech hub is in Pasadena (home one of the country's top technology schools: Cal Tech). Fashion and textiles are traditionally downtown, while defense businesses tend to be clustered in the South Bay.
If you're starting a retail business, the West Side of Los Angeles, is typically the most high demand area, says Richard Rizika, an executive vice president for retail at Los Angeles-based commercial real estate firm CB Richard Ellis. (The West Side is typically defined as the area around the 405 Freeway, including neighborhoods such as Century City, Westwood, and Venice Beach. It also includes the cities of Beverly Hills, Culver City, and Santa Monica, among others.) Prices in that part of the city will reflect its popularity: it's not uncommon to see an asking price in excess of $10 per square foot a month, according to Rizika.
Prices for office space are also most expensive on the West side, averaging $3.40 per square foot a month in the second quarter of 2010, according to a report by CB Richard Ellis. "If you want a very central location in the middle of clients, it's going to cost you a lot more," Pettigrew says. "You have to weigh the pluses and minuses. We considered Santa Monica, but it was unrealistic for us." The Visionaire Group is located nearby, near the Marina del Rey neighborhood.
If a prime piece of real estate is still a must this year, you might be in luck. "In the past, new businesses found it very difficult to secure those opportunities because were absorbed the fastest, especially with existing businesses trying to trade up to those locations," Rizika says. "This is a good time to get in the market."
Still, it could end up working to your advantage to look beyond the West Side and other popular areas, like the South Bay or west San Fernando Valley. After a lengthy search process, Jean Shim-Min and her husband Craig Min settled on the Silver Lake neighborhood, towards the east side of the city, for their first retail location for their wholesale coffee business, Lamill Coffee.
"On the West Side, you find a lot of places for a great sandwich, or a great cup of soup," Shim-Min says. "The East Side was much more limited. I felt that was a shame, and so we wanted to provide something for people on the East Side. Financially it made much more sense for us, but we just love the community of Silver Lake. You don't find many real communities like that."
Dig Deeper: Inside a Digital Media Company
Starting a Business in L.A.: Build Solid Relationships
When starting a business in any city, building relationships is critical. "Tapping into the right network of individuals who can help you succeed is one of the biggest determinants for success or failure of any early stage business," Suster says.
At first glance, a city the size of Los Angeles would appear an intimidating place to start building that network. However, many L.A. entrepreneurs have found the opposite to be true. "I find the venture capitalists in LA a lot more accessible, especially compared to San Francisco," Dao says. "The community is smaller, and pretty tight knit. It's easier to build relationships."
Programs like Dao's Twiistup conference, Koblasa's Start-Up Weekend LA and Start-Up Nights, and Suster's Launchpad L.A. certainly help make L.A. feel smaller than it is, at least for a start-up. Case in point: Koblasa's latest start-up Ming.ly, a personal relationship manager, got a big boost by participating in the Twiistup conference. "It was a great opportunity to present our business and get valuable feedback," Koblasa says.
It's not Silicon Valley, but venture capital and angel networks are still relatively strong in Los Angeles. "There is a reasonably mature VC structure here," Dao says. "There is money here. It seems to be that people move to L.A. when they've made it."
L.A. start-ups are slightly different in character from their neighbors to the north in Silicon Valley. "What's unique about raising money to start a business here is that most Southern California investors expect to see immediate monetization," Suster says. "They're willing to give you less capital than you might be able to rase in New York or San Francisco, but you find a lot of early stage companies that find ways to make money fast."
Obviously, venture capitalist funding isn't for every type of business. That's why Suster suggests you shouldn't start there. "Start with the experts in your own industry," he says. "Not only are they going to help you with the experiences they have learned, but they often serve as a board of advisors and your initial source of capital."
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Starting a Business in Los Angeles: Prepare for the Challenges
Don't let the sunny skies and sandy beaches fool you: Building a business in Los Angeles does come with its fair share of challenges.
The vast geography of L.A. and its surrounding cities, as well as the notoriously clogged freeways that connect them, is one of the region's major obstacles. "I've missed meetings and had to reschedule because of the 405," Pettigrew says.
California isn't one of the easiest places to set up a business, either. "California is the least friendly business state in the country in terms of regulations, taxes, and the cost of workers comp," says David Glickman, founder of Hometown Telecom, a international telecommunications provider based in Los Angeles. "The cost of living is high. Taxes in the city of Los Angeles are pretty high too. But despite that, the talent of the workforce and the entrepreneurial spirit of L.A. outweighs the difficult business environment."
Another challenge is competition, not just among businesses but even for that top talent Schofield values. "Competition for talent in L.A. is intense," Pettigrew says. "Often newer businesses will overpay for employees which can artificially drive up salaries to levels that are not warranted, even with the higher cost of living in LA."
Despite the challenges, don't be afraid of them. Rather, try to use them to your advantage. "There's definitely a lot of competition in L.A.," Koblasa says. "But the good news is that you immediately have access to those networks of people to learn how to build your business better."
Dig Deeper: How to run a virtual company.
Starting a Business in L.A.: A Creative City at Your Fingertips
Los Angeles is the creative capital of the world. Well, at least according to a 2009 report on the creative economy by Otis College of Art and Design, which found that one out of every six people in the region is employed in a creative field. So, there's a lot of creative energy pulsating throughout the city, leaving you a good chance to being inspired.
Some inspiration will definitely come in handy to overcome the region's challenges. Hometown Telecom, for example, uses telecommuting to solve the traffic puzzle. The company has no physical office space or administrative support staff — only five principals who manage the day-to-day operations of the company from their homes. "I can't imagine doing this in any other city than L.A.,' Glickman says. "There's an entrepreneurial, 'yes we can' spirit here."
Worried about the cost of rent, but still want an office? Co-working spaces are also becoming popular. Koblasa rents space at one for his latest start-up venture, Ming.ly.
Talent is one of the most important concerns for start-ups. If you're doing business in L.A., then you're in luck. "There is tremendous talent here, especially if you're starting a small company," Glickman says. "Southern California is really a mecca of small and medium sized companies, with lots of resources, especially talent."
You don't have to stay local, either. Calling Los Angeles home base has its advantages when recruiting from other cities and internationally. "There's a very diverse culture here, and we see that as a big advantage for recruiting international talent," Pettigrew says. "It's easier to get them here, rather than if we were in Detroit or Denver."
The diversity of the Los Angeles metro area has fostered an open-mindedness unique to Angelenos. When Doug Zell was looking for another city to expand his Chicago chain of specialty coffee stores, Intelligentsia Coffee, he saw Los Angeles as a natural fit. "I find it refreshing that it's a market where people are willing to embrace new ideas and new products very openly," he says. "It's a place that's built around that."
"There is so much diversity in Los Angeles," Suster says. "We are not in the group tank like Silicon Valley. There is more than one way to build a company here."
Dig Deeper: How to Attract Talent to Your Start-up