SOUTHERN CALIFORNIA ENTERPRISE : Look Who’s Here : What’s Entrepreneurial, Small, Private and Young? The Typical L.A. County Firm, a New Study Says
In a rare close-up glimpse at who is doing business in Southern California, a new study suggests that the typical company operating in Los Angeles County is small, private, entrepreneurial and relatively young.
And surprisingly healthy and optimistic, given the gyrations of the economy in the 1990s.
“By and large, you are more likely to find a firm whose problem is very rapid growth than you are to see a company that is in the depths of despair,” said David Friedman, a lawyer and urban economist who headed the two-year effort, dubbed the New Economy Project, which was conducted with public and private funds. The project compiled a database of more than 18,500 local companies in six industries and followed up with in-depth surveys and interviews with nearly 350 of them.
What emerged is a snapshot of business, Los Angeles-style.
For the most part, the founders of these companies dug into their own pockets for start-up financing. They opened here primarily for convenience, locating in Los Angeles because the founder already lived or worked here rather than to be close to companies in the same industry or to key clients and markets.
They don’t export much. They plan to hire in the future. Their work forces are diverse. They train their employees themselves, having little use for university or government-sponsored programs.
The biggest local challenges they say they face are an unfriendly regulatory climate and the high cost of business--and they’re pretty unhappy about those.
“They are generally self-financed entrepreneurs who are trying to find constantly changing and improving markets for their products,” Friedman said. “The most successful of them have found other companies to collaborate with.”
The report, released last week, has been embraced by the Riordan Administration as a companion to Los Angeles’ economic development efforts.
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525 Post Production is a fast-growing part of the Los Angeles economy. Casa Herrera is another. Neither is pleased with what the city has had to offer it lately.
525 Post Production inhabits the glitzy world of Hollywood, music videos and television images. The 7-year-old company does post production--editing, sound mixing, special visual effects and the like; its name refers to the number of scan lines on a TV screen.
Casa Herrera manufactures equipment to make tortillas and chips, and is situated in an industrial area south of downtown. It was founded 44 years ago by a door-to-door salesman named Frank Herrera. Now, three years after his death, eight of his nine children work at the company.
At 525, business has been good despite the economy’s problems, said President Steve Michaels, who founded the company with two other investors and with help from the Virgin Group, a London-based company better known for its records and airline. (Virgin has since purchased all of 525.)
“I think we were good at what we did,” Michaels said in explaining the company’s success.
Casa Herrera has benefited with the world’s growing appetite for Mexican food, which has sent the Herreras to such far-flung places as China and Saudi Arabia to install machinery. Even Mexico is opening up as a market, President Al Herrera said.
But 525 (95 employees, $19 million in revenues) and Casa Herrera (160 employees, $15 million-plus in revenues) have encountered roadblocks. (Both companies were among those surveyed as part of the New Economy Project.)
For 525, it is crime that scares customers away in the evening from its 1937 Art Deco building. For Casa Herrera, it is an aging factory that is about one-third the size of what is needed. They say they could use some help but have not been able to find any.
“Crime is the big issue for us,” Michaels said. “We’re in a 24-hour business, and we lose business in the evenings because people don’t want to come to Hollywood.”
Casa Herrera is actively looking for a new factory and has found that other parts of Southern California are much more aggressive than Los Angeles in courting them.
“The city has kind of ignored us a little bit,” Herrera said. “We would like to stay in Los Angeles, but it depends on what they can put on the table and how soon.” Herrera said he considers it a good sign that he received a phone call from Mayor Richard Riordan last week. However, he added, the contact came two months after he had sought help from the city in finding a new site.
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The New Economy Project looked at firms accounting for nearly 10% of the county’s work force in metalworking, mechanical engineering and aerospace subcontracting; biomedical; environmental instruments and consulting; textiles; computer hardware and software, and entertainment crafts.
In addition to its finding a healthy industrial base, the study also, in its relatively small sample, sketches a portrait of the typical Los Angeles company: 96% are privately owned, and 97% have 100 or fewer employees. A whopping 78% were founded in Los Angeles County simply because the people were already here. Two-thirds of the companies started with family funds, 13% used bank loans, 6% used venture capital and 1% got government assistance.
These companies plan to hire in the future. A total of 51% reported such plans, indicating overall an intention to increase work forces by about 14% during the next five years, or about 3% per year.
Their work forces are diverse: Minorities are in 32% of management positions and in 40% of research and development jobs. Most use internal programs to train employees; 11% turn to universities or local trade associations, 7% to California programs and 3% to federal programs.
An average of 49% of revenues are derived locally, and an average of only 11% of revenues come from exports, indicating “the possibility for substantial regional growth if additional export encouragement or assistance was provided to local firms,” the report says.
The companies’ biggest general business challenges are economic: finding new markets (23%), regulations and the cost of doing business (15%), new product development (15%), access to capital (13%) and improving competitiveness (10%). Their biggest local challenges are unfriendly business climate (30%), the high cost of business (30%), declines in the quality of life (11% to 14% on each of the three choices in the survey) and recession and loss of confidence (11%). “Despite the region’s still substantial economic strengths,” the report notes, area firms “have a strikingly negative view” of the regulatory and social environment they operate in.
Business, Los Angeles Style
A detailed in-depth survey of nearly 350 local firms conducted by economist David Friedman found an all-but-forgotten economy composed of small self-reliant companies that are relatively healthy and optimistic about the future.
* Why They Are Here
The typical Los Angeles business was started here not for proximity to competitors or clients or markets, but for a very simple reason: The founder was already here. Respondents were allowed to give more than one reason. Reasons Cited for Opening a Firm in Los Angeles County: Convenience (founder lived, was educated or worked in the region): 78% To be near companies in the same industry: 24 Proximity to clients and markets: 15 Growth potential--good business climate: 15 Infrastructure (ports, freeways, airports, etc.): 10 Quality of life (weather, crime, etc.): 10 Labor availability: 7 Proximity to suppliers: 6 Proximity to Pacific Rim: 3 To promote exports: 1 * Employment Plans
More than half of the companies surveyed said they plan to hire in the future. Those firms said they expect to increase their work forces by 14% during the next five years, or about 3% per year.
Firms reporting Firms reporting they aren’t sure Industry they will hire they will hire Environmental 68% 22% Biomedical 64 18 Software 56 28 Computer hardware 52 37 Textiles 45 35 Machinery & metalworking 43 40 Entertainment 38 23 Aerospace 29 50 Totals 51 31
Source: New Economy Project, economist David Friedman
