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Venture Deals in LA Are Slowing Down, And Other Takeaways From Our Quarterly VC Survey
Keerthi Vedantam
Keerthi Vedantam is a bioscience reporter at dot.LA. She cut her teeth covering everything from cloud computing to 5G in San Francisco and Seattle. Before she covered tech, Keerthi reported on tribal lands and congressional policy in Washington, D.C. Connect with her on Twitter, Clubhouse (@keerthivedantam) or Signal at 408-470-0776.
It looks like venture deals are stagnating in Los Angeles.
That’s according to dot.LA’s most recent quarterly VC sentiment survey, in which we asked L.A.-based venture capitalists for their take on the current state of the market. This time, roughly 83% of respondents reported that the number of deals they made in L.A. either stayed the same or declined in the first quarter of 2022 (58% said they stayed the same compared to the fourth quarter of 2021, while 25% said they decreased).
That’s not hugely surprising given the sluggish dynamics gripping the venture capital world at large these days, due to macroeconomic factors including the ongoing stock market correction, inflation and Russia’s invasion of Ukraine. While startups and VC investors haven’t been hit as hard as public companies, it looks like the ripple effects are beginning to bleed into the private capital markets.
Image courtesy of Hagan Blount
In addition to slowing deal volumes, most investors said they’re seeing startup valuations lose momentum, as well: Roughly 81% said valuations either stayed the same or decreased from the previous quarter, with nearly 39% noting a decline.
Should that sentiment continue moving forward, it could spell bad news for startups as far as raising the money they need for growth, investors said.
“If I was a startup right now, I would be making sure I have plenty of runway,” said Krisztina ‘Z’ Holly, a venture partner at Good Growth Capital. “When it looks like there's some potential challenges ahead in the market, it’s good to fill your war chest.”
Among VC respondents, about 86% said they believed that valuations in the first quarter were too high—one potential reason why deals slowed down in the first quarter, according to TenOneTen Ventures partner Minnie Ingersoll. She noted that L.A.’s growing startup scene features more early-stage ventures, whose valuations haven’t come down the way later-stage startup valuations have.
“I would say we are just more cautious about taking meetings where the valuations are at pre-correction levels,” Ingersoll said. “We didn’t take meetings because their valuations weren’t in line with where we thought the market was.”
While most respondents said the Russia-Ukraine war didn’t have much impact on their investment strategies, some 22% said it did have an effect—with one VC noting they had to pass on a deal in Russia that they liked.
Is There a Flight Out of Los Angeles?
Los Angeles was heralded as the third-largest startup ecosystem in the U.S. at the beginning of the year, behind only San Francisco and New York. Yet nearly one-third (31%) of VC respondents said that at least one of their portfolio companies had left L.A. within the past year. It won’t come as a huge surprise that the city of Austin, Texas has been one of the prime beneficiaries of this shift—with roughly half of those who reported that a portfolio company had left L.A. identifying Austin as the destination.
The tech industry’s much-hyped “exodus” from California has been widely reported on, especially as more companies have embraced the work-from-home lifestyle and also opted to move their operations to lower-cost cities and states. Most notably, Elon Musk has recently moved two of his companies, electric automaker Tesla and tunnel infrastructure startup The Boring Company, from California to Texas (with both of those firms moving in and around Austin).
“In today's competitive market with lots of capital to invest, we think the next generation of successful VCs are going to be diverse in markets (not just Silicon Valley)... [and] have access to undiscovered founders from everywhere,” said one survey respondent.
NFTs Aren’t Popular With VCs—But Web 3 Is
“It’s the future,” according to one respondent. “Buckle up and get on board.”
Are NFTs...
More than 71% of VC survey respondents said they were bullish on Web3—the new blockchain-enabled iteration of the internet, which promises decentralization and a whole range of applications involving cryptocurrencies, NFTs, DeFi and more. It’s the same sentiment informing Santa Monica-based VC firm M13’s new $400 million fund, which considers Web3 a core piece of its investment thesis.
In Q2 2022, do you expect your portfolio companies to:
L.A. is home to an ever-growing cadre of Web3-focused startups operating across the realms of finance, entertainment and other industries. But while local investors are willing to pour money into blockchain-related ventures, one segment of the space continues to evoke skepticism: Only 18% of respondents would describe NFTs as “a good investment,” while 33% thought they were “bad” investments and 39% said they were unsure.
As in our last survey several months ago, it appears that NFTs continue to divide opinion, with respondents expressing differing perspectives on their value and utility. One referred to them as “get rich quick schemes,” but added that the art pieces and social communities that emerge from them may be valuable. Another said that “NFTs as a digital medium are a legitimate thing”—but noted the vast majority are “awful investments with no intrinsic value.”
Graphics courtesy of Hagan Blount.
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Keerthi Vedantam
Keerthi Vedantam is a bioscience reporter at dot.LA. She cut her teeth covering everything from cloud computing to 5G in San Francisco and Seattle. Before she covered tech, Keerthi reported on tribal lands and congressional policy in Washington, D.C. Connect with her on Twitter, Clubhouse (@keerthivedantam) or Signal at 408-470-0776.
https://twitter.com/KeerthiVedantam
keerthi@dot.la
What Hailey Bieber’s Skincare Company Reveals About Influencer-Led Brands
08:58 AM | March 06, 2023
When Hailey Bieber launched Rhode skincare last June, the release was coupled with YouTube videos detailingeachproduct. Bieber has since fully integrated the skincare line into her content, bringing on other beauty influencers to discuss it and highlighting it in get ready with me videos on her channel.
Bieber’s efforts paid off—Rhode has since become one of the most talked about skincare brands online, and the products often sell out. At The Upfront Summit last week, Bieber joined OBB Media CEO and founder Michael Ratner, who produces her YouTube series “What’s In My Bathroom” and “What’s In My Kitchen,” to discuss how she has merged her content creation with her business endeavors.
“YouTube is a great home because, most importantly, we’re able to reach Hailey’s audience,” Ratner said, adding that they can “cut out the middleman” of a traditional streaming service.
Bieber isn’t alone in utilizing her online platforms to start a beauty company. Kylie Jenner launched Kylie Cosmetics in 2014, and the line consistently receives high social media engagement thanks to intentional influencer marketing. But even influencers without the celebrity status of Jenner and Bieber have become entrepreneurs. Beauty YouTubers like Michelle Phan and NikkieTutorials have turned their expertise into makeup companies, while TikToker Hyram Yarbro did the same with skincare.
So how does the content creator to skincare mogul pipeline work?
Oftentimes, outside companies approach influencers about launching their own brands. Beauty and makeup brand incubator Madeby Collective, for example, was seeking a Gen Z star to be the face of a new line in 2020, and TikTok darling Addison Rae was the obvious choice. After approaching the influencer, they gave her the title of co-founder and Chief Innovation Office before launching Item Beauty later that year.
Bieber is trying to shove Rhode to the front of a field that even she admitted is incredibly crowded. Despite this, Bieber didn’t have a compelling answer when moderator Kobie Fuller asked how Rhode can stand out.
“To me, Rhode is a whole world. It’s a world of me, essentially” Bieber said. “In order for people to understand my vision for the brand, they would have to understand me.”
Bieber has become known for her various “glazed donut” looks, which range from nail designs to her skincare line. Multiple TikTok and YouTube tutorials re-created these looks as the trends swept through online beauty communities. And it doesn’t hurt when the person manufacturing these trends can use these platforms to show exactly how she gets these results—and promote her brand along the way.
Still, closely tying one’s company to one’s public perception is risky. On the extreme end is influencer Jeffree Star, who launched his cosmetics company in 2014 and often used elaborate YouTube videos to promote products. His items sold out quickly. But accusations of racism and sexual assault caused sales to decline. The fallout extended beyond him—beauty company Morphe, which rose to popularity through collaborations with Star, recently closed all of its U.S. locations due to low sales. Dragon Beauty, a company launched by YouTuber Nikita Dragon, was put on hiatus last month following the influencer’s arrest.
To that end, Bieber is currently embroiled in her own internet drama, having lost over one million Instagram followers after seemingly re-igniting her feud with Selena Gomez. Obviously, this is not comparable to the situations with Star and Dragon. But it does point to how even a slight misstep can have ripple effects on an influencer’s business and the fragility of someone’s online reputation.
The panel didn’t touch on this topic, and it’s unclear how the scandal has impacted Rhode’s sales—but the brand has become tangled with it. When Bieber re-posted someone’s Instagram story about Rhode that included a song featuring Gomez, fans noted that she changed the song to the version without Gomez. In turn, Gomez fans are urging people to stop buying Rhode products.
Even without pushback from vitriolic fan communities, influencer-led brands have struggled in recent months. In January, Sephora stopped carrying both Rae and Yarbro’s products after sales slowed down. Now, expertsare wondering if this is the beginning of the end for influencer-backed brands. Some have managed to produce products that can stand on their own—ironically, Gomez’s makeup line Rare Beauty has become the gold standard in this area. But Bieber’s philosophy of creating “aesthetically pleasing products that work” isn’t all that different from her competitors.
Still, it’s unlikely that influencer-led brands will die out considering 92% of Gen Z adults make their purchasing decisions based on influencer recommendations. But influencers are finding that getting people to spend money is a more difficult task than getting them to watch a video. And when influencer-entrepreneurs like Bieber are unable to quickly articulate what makes their brands stand out, it’s understandable why viewers aren’t buying what they’re selling.Read moreShow less
Kristin Snyder
Kristin Snyder is dot.LA's 2022/23 Editorial Fellow. She previously interned with Tiger Oak Media and led the arts section for UCLA's Daily Bruin.
https://twitter.com/ksnyder_db
Upfront Ventures Summit: The Chainsmokers Journey From Music to Venture
02:16 PM | March 02, 2023
Clark Studio
On Thursday, Upfront Ventures hosted its 2023 Summit and music icons Alex Pall and Drew Taggart of The Chainsmokers hit the stage, not to perform, but instead to discuss their venture journey.
The duo launched MantisVC, a Marina Del Rey-based early stage tech venture fund in 2019.
Pall and Taggart shared the stage with WndrCo’s managing partner Jeffrey Katzenberg to dive deeper into what their music career has taught them and how it translated over to their venture firm.
Here are some of the most important takeaways:
The duo believes hustle is more important than talent to achieve success.
“There's just so much content out there that's just happening all the time for no reason,” Taggart said. “There's just so much to pay attention to and if you have to wake up every day, and think out what your angle is going to be, try stuff, have it not work. You have to accept defeat so frequently and still get up and do it.”
Creating music was their foray into building communities.
“I think we have some real insight into how to build that community and tell that story because essentially, that's all we're trying to do,” Pall said. “No matter what your business is, you're telling the story about something that you think is important that someone else needs and will enjoy.”
Building connections and having conversations with pioneers in the space helped them launch MantisVC.
“Humility and being self aware are two of our strengths,” Taggart said. “I think knowing what we don't know is a big part of how we've gotten to where we are, and with the support of people around us, and the relationships we built, we understood that we were going to have to go out and prove to the world that we were serious about this and we respected the people that have come before us and the people that are doing it right now.”
VCs should offer all their founders support.
“When you're building something early on, you want that support, that hands-on feeling and the purpose of Mantis isn't necessarily right now to replace the incredible institutional investors that exist out there and have been around for a while,” Pall continued.
“But we want to be the Robin to their Batman, and we think there's a way that we can kind of partner with everybody in the space and provide our founders that holistic support they need. It's inspiring to work alongside people that share that same energy and we're constantly working on ourselves and I feel like it takes a really special type of human being to be successful in this world. Level of grit and determination and something that's continually fueled us and we want to invest in people like that.”
Feedback is necessary and essential to create successful products and businesses.
“Similar to products or services that you're building, it's important to get real life feedback out there and iterate on those things,” Taggart said. “And there's really just no substitute for that.”
Pall added, “I think for some reason in our culture, it's become an issue for people just to be straightforward and say no, about things and give honest feedback and, and move on. I think we can all learn a lot from just having more honest conversations with each other.”
Never lose sight of your core audience and mission as a company.
“Never forget what your core product is and what people love about that and make sure that every piece of innovation is derivative of that,” Taggart said. “I see a lot of friends of ours that have had really successful companies start to build ancillary projects that don't really feed their core audience that they're just making to compete with their competition. We do the same thing in songwriting, and you can never lose sight of what people love about you.”
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Decerry Donato
Decerry Donato is a reporter at dot.LA. Prior to that, she was an editorial fellow at the company. Decerry received her bachelor's degree in literary journalism from the University of California, Irvine. She continues to write stories to inform the community about issues or events that take place in the L.A. area. On the weekends, she can be found hiking in the Angeles National forest or sifting through racks at your local thrift store.
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