• VC Erik Rannala on the “More Cautious” L.A Startup Scene

    erikrannalaL.A. has been receiving a lot of attention from investors lately, as local venture capitalist Mark Suster enthusiastically observed in a detailed overview of the market yesterday. Indeed, as Suster noted, SVAngel’s David Lee and early Twitter investor Chris Sacca are among a small but growing number of investors who’ve relocated to L.A. to capture its upside.

    Erik Rannala certainly gets it. Rannala was a product manager at eBay who went on to spend nearly three years running the seed-stage firm Harrison Metal with his former eBay colleague Michael Dearing. The gig, in Palo Alto, was great. But when another former eBay colleague, Will Hsu, proposed working together in L.A., where Rannala’s wife grew up, he leapt at the opportunity, forming the L.A-based accelerator MuckerLab with Hsu in 2011. (The two have since raised a $20 million seed fund called Mucker Capital.)

    As far as Rannala is concerned, there’s a lot of love about the L.A. scene. For one thing, entrepreneurs are “more cautious with their burn because capital isn’t nearly as plentiful in L.A. as in the Bay Area, or even New York.” He likens their mindset to someone “growing up during the depression . . . even when you eventually have infinitely more capital, it’s harder to shake the frugality that was learned the hard way in leaner times.”

    Many entrepreneurs in the Bay Area “haven’t experienced that,” he notes.

    Valuations are also “more reasonable,” Rannala says, insisting that “dollar for dollar, you’re getting more for your money down here than in the Bay Area at the top of the cycle.”

    Rannala thinks it’s a little easier for L.A. entrepreneurs to escape the groupthink of Silicon Valley, too. “We’re seeing a lot of entrepreneurs here who are looking at existing industries that are getting software enabled [and figuring out how to expedite their transition] rather than doing purely derivative things like social,” though there’s plenty of that, too.

    As an example, Rannala points to Santa Monica-based Surf Air, a members-only airline that offers unlimited flights for a $1,750 a month. The venture-funded company started flying last year with three used single-engine turboprops that seat seven passengers. It recently ordered 15 new Pilatus PC-12 NG aircraft. (*MuckerLab wrote the company’s first check. Surf Air has gone on to raise $18.8 million altogether.)

    Everything said, Rannala, who still travels regularly to the Bay Area, is trying to be pragmatic about L.A.’s boom times. Though he doesn’t think for a minute that “LA is a flash in the pan” – for a long list of familiar reasons, he argues that the tech ecosystems in both L.A. and New York “are not short-term phenomena” — he also notes that a “shortage of indigenous local capital up and down the stack,” could mean problems if the market turns.

    Bay Area investors are “inclined to invest outside the Bay Area right now, particularly when it comes to companies that are further along,” Rannala observes. “It’s [to be determined] how this evolves when we’re at the bottom of the cycle.”

    *An original version of this story reported that MuckerLabs was not an investor in Surf Air. Apologies for the mix-up.

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