Downtown L.A. as High-Tech Hotbed?
In the deserted, weed-covered lots of Los Angeles’ urban core, Tim Draper sees fertile ground for a thriving high-tech community. And Silicon Valley venture capitalist’s vision for a high-technology center is as broad as the 19-square-mile area--from South-Central to East L.A. to Dodger Stadium--that he’s targeting.
In this unlikely area, Draper is leading an effort to invest at least $25 million of federal funds--and perhaps an equal amount of private capital--in high-tech start-ups.
The money, apportioned by the Los Angeles Community Development Bank, could help the heart of Los Angeles follow in the footsteps of other economically depressed districts that have morphed into technology hot spots, such as San Francisco’s Multimedia Gulch and New York’s Silicon Alley.
“We will be backing driven, hard-working entrepreneurs who are going to make a huge impact and hopefully build great companies,” said Draper, a managing director for the new redevelopment-oriented venture capital fund, Zone Ventures. “We want to create a can-do atmosphere with great opportunity.”
If Zone Ventures succeeds--and its proponents emphasize that it will take at least a decade to find out--federal money could be turned into venture capital in cities throughout the country.
“There are no counterparts to this any place else,” said Tom Honore, senior community builder/coordinator in the Los Angeles office of the Department of Housing and Urban Development, which supplied most of the venture money. “HUD is looking at this to see whether or not we can replicate it in other places.”
The Community Development Bank opened for business in 1966 with the goal of redeveloping some of the city’s most neglected neighborhoods, where retail, garment and service businesses dominate the economy. From the beginning, the bank earmarked $55 million of its $430 million in HUD funds for venture capital to support industries--such as technology--that offer the promise of more robust growth, said Rena Haviland, who serves as the bank’s general counsel and manages its venture capital program.
This summer, the bank put Draper’s Redwood City firm, Draper Fisher Jurvetson, in charge of its maiden venture fund after considering several venture capital firms. DFJ has invested in more than 150 high-tech companies, ranging from local area network firm Banyan Systems to Hotmail, which provides free e-mail accounts.
Zone Ventures’ two-man operation in Los Angeles--Frank Creer, managing director, and David Cremin, partner--already is searching through business plans and researching promising companies. Most investments will be for early stage financing and will average about $750,000. In addition to the money, Zone Ventures will supply companies with a board member and financial, technical and marketing advice, Creer said.
In exchange for the investment, companies must locate in the empowerment zone, Draper said, and must hire workers who live in the zone once the business starts growing. Under separate federal, state and local programs, companies in the zone can earn a variety of tax credits for hiring local residents. Draper said he expects clusters of high-tech companies to form in areas like downtown and around USC, then gradually spread into the middle of the zone.
Venture capital investments in general are high-risk, but Zone Ventures’ approach takes on the additional risk of trying to mix high-tech with an area better known for high crime. The empowerment zone was created to help communities that suffered the worst damage in the 1992 Los Angeles riots and have yet to recover economically.
Some entrepreneurs who are already located in the empowerment zone say it will take more than venture capital to make the zone attractive to high-tech firms.
“Unless you go up to downtown, there really isn’t very much in terms of facilities here,” said Philip Alford, chairman of Verix Software, an electronic commerce software firm based in USC’s EC2 technology business incubator. “There’s some great old buildings, but they need a lot of work. There are some great old warehouses and retail areas, but someone needs to go put some money into them.”
Still, the idea may be catching on. Scott Fedewa, chief executive of the Musicosm, said he is considering moving from high-rent Beverly Hills to the empowerment zone now that his company is focusing less on the entertainment industry and more on the World Wide Web.
“We see a real opportunity in the downtown area,” Fedewa said. “There’s a lot of great infrastructure and professional services. It’s also an opportunity to contribute to the revitalization of the city.”
Mike Pfeiffer, executive administrator for the Central City South Assn. of Commerce and Industry, said many buildings in the area could be converted to high-tech use. Previous efforts to attract businesses to the empowerment zone have not been “packaged and promoted” as well as they should have been, he said.
There is widespread agreement among local businesses and economic development experts that a dearth of venture capital has held Southern California’s technology industry back. Other financing options, such as traditional bank loans or maxing out credit cards, often don’t give companies enough time to get on their feet before the repayment schedule kicks in, said Rocky Delgadillo, L.A.’s deputy mayor for economic development.
Along with smaller initiatives to build a sense of community among high-tech firms in the zone, Draper and the Community Development Bank’s Haviland said the venture capital will put Los Angeles on the road to replicating Silicon Valley’s success.
“This is not a quick fix. It will take years,” Draper said. “However, I believe people are going to start thinking of the zone in a positive light in a shorter period of time.”
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More information about Zone Ventures is available at https://www.zonevc.com. Tim Draper will be speaking on a panel Sunday at The Times Small Business Conference.
