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Prediction: LA's Startup Shakeout Will Continue Into 2023, Setting Survivors Up for Long-Term Success
Spencer Rascoff
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
For years, the VC funding environment in Los Angeles and beyond has defied the laws of gravity. When it came to tech expansion, the unofficial ethos seemed to be: what goes up must stay up. But recent forces have conspired to paint a much different picture than we’re used to seeing, and the effects are being felt at every stage of the startup ecosystem.
My prediction: while the future funding forecast looks bleak and will stay that way for a while, it’s not without its bright spots, especially for those who are in it for the long run.
The Fed Effect
Here’s where it started: In the public equity markets, the tide began to turn as the Fed started raising interest rates in order to tame inflation. This jumpstarted a risk-off mentality, which happens when there’s increased uncertainty, even pessimism, about the economic outlook. Higher discount rates due to higher interest rates lead to growth stocks trading down.
It’s been a dazzling display of volatility. Market-wide, we’ve seen high-growth tech stocks decline significantly in the past six months— many tech stocks are down 50%-plus in the last year. 2022 was rough.
On the extreme end, Carvana shares have dropped 97%. Shopify stock is down 80% in 2022 and even Amazon, which to-date has seemed relatively bulletproof, lost more than 40% of its value since January 1. These are good examples of not only the problem at hand, but also the opportunity.
Crossover investors—those who do both public and private market investing—suddenly see public market opportunities again. They can now buy high-quality liquid assets in public markets at historically low multiples.
That’s the exact opposite of a few years ago when public equities were valued very highly. Then, crossover investors simply couldn’t find great returns in public markets, and chose instead to fish upstream into the private market investing tide pool to find viable prospects. That helped fuel the expansive L.A. (and elsewhere) startup success we’ve known to-date.
Stock-Induced Gridlock
Now that crossover investors have returned more to the public markets (or have stayed on the sidelines), and more traditional growth investors see a more difficult path for their companies to IPO, the local venture landscape has changed. Late-stage funding opportunities and the IPO markets have essentially shut down. Most companies that raised money at high valuations can’t go back because they can’t command such a high price in the public markets.
A year or two ago, it was typical to see a $5 million seed round at a $25 million valuation. Today, that’s an incredibly difficult hurdle to jump. I see numbers closer to $2 to $3 million at $10 to $15 million valuations, and even that feels like a significant success.
This is where the gridlock begins. This scenario forces late-stage private companies into a pretty undesirable corner. They essentially have two options: A) raise a flat or down round or B) cut expenses and extend runway. While neither are ideal, most companies who can are choosing the lesser of two business evils: option B.
This means that the majority of growth-stage companies raising now are only doing so because they’ve run out of cash and will shut down without additional funding. This reinforces the prevalence of down rounds in the market.
And at the end of the line? IPOs, the final step, simply aren't happening right now. It’s gridlock from start to finish.
Ripples, Then Rebound
One of the biggest implications of these market shifts is that not only do companies have less capital, but also less access to future capital. These days, cutting costs is tantamount to survival, and though necessary, it’s having a ripple effect throughout the tech industry. Hiring has slowed. Marketing expenditure has decreased. Expenditures overall are down. On top of these startup trends, consider the major layoffs happening at Meta, Snapchat and other large- and small-scale players, and it’s hard to see anything but a grim outlook ahead.
But my perspective: the long view isn’t all bad. Because companies are taking this chance to focus on unit profitability and sustainable growth, they’re setting themselves up for future success.
The L.A. market is particularly poised to weather this storm, in large part because it’s a hub for sectors that are standing strong mid-downturn.
Clean tech, a catchall name for everything from green energy to sustainable building materials to electric cars, is booming, and L.A. is benefiting. One of the pioneers of the space, Rivian, is based just outside L.A. in Irvine, and companies like Universal Hydrogen, Loop and EVGo are all based in the area.
The defense tech and aerospace industries are also on the uptick, and L.A. is home to some of the most innovative startups in those verticals. Take for instance Apex Space, a Culver City-based startup dedicated to producing better spacecraft at scale, and Relativity Space, which is building the first autonomous rocket factory and launch services for satellites. One of the largest venture rounds of the year was just announced for Anduril, a tech-enabled defense contractor based in Costa Mesa. SpaceX, one of the most highly valued private companies, is based in Hawthorne and continues to thrive. (Disclosure: my venture fund, 75 & Sunny Ventures, is an investor in Apex, Relativity and SpaceX.)
Mega rounds for powerhouse companies like Anduril and SpaceX during this down market have meant that, in contrast to most of the country, late-stage funding in L.A. has actually increased relative to early-stage funding. Still, early-stage startups in L.A. continue to thrive. In terms of deal count, seed and early-stage investments make up 75% of L.A.’s venture rounds, driving the flywheel that has made L.A. tech so dynamic over the past few years.
If you hated the last few months, as I have, remember that this too shall pass. The Fed will slow and eventually halt rate rises, and I’d bet the halt will be followed by rate declines (in late 2023?). My prediction: by late 2023 or 2024, the funding market will improve and the weather will turn. Maybe we won’t get completely back to “75 and Sunny” for a while, but the gruesome second half of 2022, which will continue in 2023, will subside late next year. 2023 will be a lost year, a year in which startups should focus on surviving not thriving. Those that make it to the other side of this downturn, like those which survived the 2008 and 2000 downturns, will become long-term winners and be stronger for having weathered this storm.
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Spencer Rascoff
Spencer Rascoff serves as executive chairman of dot.LA. He is an entrepreneur and company leader who co-founded Zillow, Hotwire, dot.LA, Pacaso and Supernova, and who served as Zillow's CEO for a decade. During Spencer's time as CEO, Zillow won dozens of "best places to work" awards as it grew to over 4,500 employees, $3 billion in revenue, and $10 billion in market capitalization. Prior to Zillow, Spencer co-founded and was VP Corporate Development of Hotwire, which was sold to Expedia for $685 million in 2003. Through his startup studio and venture capital firm, 75 & Sunny, Spencer is an active angel investor in over 100 companies and is incubating several more.
https://twitter.com/spencerrascoff
https://www.linkedin.com/in/spencerrascoff/
admin@dot.la
Here's How To Get a Digital License Plate In California
03:49 PM | October 14, 2022
Photo by Clayton Cardinalli on Unsplash
Thanks to a new bill passed on October 5, California drivers now have the choice to chuck their traditional metal license plates and replace them with digital ones.
The plates are referred to as “Rplate” and were developed by Sacramento-based Reviver. A news release on Reviver’s website that accompanied the bill’s passage states that there are “two device options enabling vehicle owners to connect their vehicle with a suite of services including in-app registration renewal, visual personalization, vehicle location services and security features such as easily reporting a vehicle as stolen.”
Reviver Auto Current and Future CapabilitiesFrom Youtube
There are wired (connected to and powered by a vehicle’s electrical system) and battery-powered options, and drivers can choose to pay for their plates monthly or annually. Four-year agreements for battery-powered plates begin at $19.95 a month or $215.40 yearly. Commercial vehicles will pay $275.40 each year for wired plates. A two-year agreement for wired plates costs $24.95 per month. Drivers can choose to install their plates, but on its website, Reviver offers professional installation for $150.
A pilot digital plate program was launched in 2018, and according to the Los Angeles Times, there were 175,000 participants. The new bill ensures all 27 million California drivers can elect to get a digital plate of their own.
California is the third state after Arizona and Michigan to offer digital plates to all drivers, while Texas currently only provides the digital option for commercial vehicles. In July 2022, Deseret News reported that Colorado might also offer the option. They have several advantages over the classic metal plates as well—as the L.A. Times notes, digital plates will streamline registration renewals and reduce time spent at the DMV. They also have light and dark modes, according to Reviver’s website. Thanks to an accompanying app, they act as additional vehicle security, alerting drivers to unexpected vehicle movements and providing a method to report stolen vehicles.
As part of the new digital plate program, Reviver touts its products’ connectivity, stating that in addition to Bluetooth capabilities, digital plates have “national 5G network connectivity and stability.” But don’t worry—the same plates purportedly protect owner privacy with cloud support and encrypted software updates.
5 Reasons to avoid the digital license plate | Ride TechFrom Youtube
After the Rplate pilot program was announced four years ago, some raised questions about just how good an idea digital plates might be. Reviver and others who support switching to digital emphasize personalization, efficient DMV operations and connectivity. However, a 2018 post published by Sophos’s Naked Security blog pointed out that “the plates could be as susceptible to hacking as other wireless and IoT technologies,” noting that everyday “objects – things like kettles, TVs, and baby monitors – are getting connected to the internet with elementary security flaws still in place.”
To that end, a May 2018 syndicated New York Times news service article about digital plates quoted the Electronic Frontier Foundation (EFF), which warned that such a device could be a “‘honeypot of data,’ recording the drivers’ trips to the grocery store, or to a protest, or to an abortion clinic.”
For now, Rplates are another option in addition to old-fashioned metal, and many are likely to opt out due to cost alone. If you decide to go the digital route, however, it helps if you know what you could be getting yourself into.
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Steve Huff
Steve Huff is an Editor and Reporter at dot.LA. Steve was previously managing editor for The Metaverse Post and before that deputy digital editor for Maxim magazine. He has written for Inside Hook, Observer and New York Mag. Steve is the author of two official tie-ins books for AMC’s hit “Breaking Bad” prequel, “Better Call Saul.” He’s also a classically-trained tenor and has performed with opera companies and orchestras all over the Eastern U.S. He lives in the greater Boston metro area with his wife, educator Dr. Dana Huff.
steve@dot.la
Tracy Gray And Why Exports Are The Untapped Opportunity for the U.S.
06:44 AM | December 23, 2020
On this week's episode of the LA Venture podcast, hear from Tracy Gray, founder and managing partner at The 22 Fund, a growth venture capital and advisory firm focused on increasing the export capacity of Southern California companies, positioning these companies to accelerate growth and scale via international sales. She shares insights for how manufacturers should think about exports, industry 4.0 and the state of diversity in venture today.
Key Takeaways:
- Gray says culturally the United States is domestic oriented and has an economy based on consumerism. Whereas, other countries around the world have economies based on exporting, which is advantageous for creating jobs, amongst other things. She says the U.S. exports very little due to fear — for example, fear of not speaking the language, fear of not knowing the laws and fear of not understanding regulations on both sides of the arrangement.
- Capital at The 22 Fund is used to support its companies to do market research and analysis, because many of their companies are nonprofit and government, and there's little marketing out there to make companies aware of services that can help them export more confidently.
- U.S. manufacturing is old-school manufacturing, and The 22 Fund helps to "uptech" and "upskill" the workers and processes at the companies they invest in.
- The 22 Fund invests equity — some debt with warrants and revenue share — whatever works for the companies and where they are.
- The 22 Fund is most interested in investing in innovative, sustainable and clean manufacturing companies that can grow jobs.
"Women and people of color, we're...always seen as the victims of some of this stuff (climate change, racial justice, economic change), but we are the ones that come up with the solutions. We are the innovators behind this because we know what's happening very closely in our communities." — Tracy Gray
Tracy Gray is managing partner at The 22 Fund.
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Minnie Ingersoll
Minnie Ingersoll is a partner at TenOneTen and host of the LA Venture podcast. Prior to TenOneTen, Minnie was the COO and co-founder of $100M+ Shift.com, an online marketplace for used cars. Minnie started her career as an early product manager at Google. Minnie studied Computer Science at Stanford and has an MBA from HBS. She recently moved back to L.A. after 20+ years in the Bay Area and is excited to be a part of the growing tech ecosystem of Southern California. In her space time, Minnie surfs baby waves and raises baby people.
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