May 8, 2015 · 3 minutes

This week a partnership between CB Insights and Upfront Ventures brings insight into what's going on in the LA startup and venture capital worlds.

With the newly released LA Venture Capital Report: 2014 Year in Review, things appear to be trending upwards in Los Angeles, but there are a couple concerns for its continued growth.

One thing that could be key to the future of LA tech is that the area continues to have monster exits like Oculus VR, Maker Studios, and TrueCar. If Snapchat, Tinder, The Honest Company, and others follow with IPOs or strategic mergers and acquisitions over the next couple of years, the ecosystem as a whole could benefit from the increase in well-bankrolled entrepreneurs who decide to try their hand at angel investing and reinvest in the next wave of startups in the community.

And if it wants to keep up with Boston and New York, that needs to happen.

The data from the first quarter of 2015 projects this year to be one of the largest in terms of investment dollars pouring into LA. With $2 billion invested across 194 deals, 2014 was a record year for venture capital investment in LA. To start this year, the area had 37 investment deals and saw $671 million in funding go to private companies. If the next three quarters see similar activity, 2015 will surpass last year as the most impressive yet for venture deals in Los Angeles.

As Upfront’s Mark Suster says in the introduction to the CB Insights report, “Our ecosystem would benefit from more local late-stage capital and the region could stand to see more mature companies remain independent and become both acquirers and magnets attracting out of town talent to our region.”

While that’s true, as the trends show, LA could also benefit from an increase in seed funding. The area had its most impressive year ever for late stage deals in 2014, and with Snapchat’s $200 million investment from Alibaba, that trend has continued at the start of2015. But in terms of the percentage of deal flow that is going to early stage companies, 2014 saw a major decrease in seed funding relative to other stages of funding. The 38 percent of investments that occurred in seed deals in 2014 is the lowest amount since 2011 when 37 percent of deals took place at the seed stage.

And things don’t seem to be picking up. To start 2015, 26 percent of the total amount of deals happened in seed rounds. Which is why it is important for LA to continue to have more exits like Lynda.com as the year progresses. Again, success begets success, and if Silicon Valley — and NYC/Boston to a lesser degree — show, it’s that large exits and M&A money trickles down from fund returns and entrepreneurs-turned-angels to start the next cycle in startup growth.

The other bad news, in terms of comparing startup communities, is that Los Angeles' startup mojo isn't rising like it is in New York and Boston, as far as the amount of VC money invested is concerned. While Los Angeles had caught up to Boston and seemed to set its eyes on outpacing New York in VC investments in 2013, last year was a disappointment comparatively. Not only did it fail to keep pace with Boston and NYC, but it fell drastically behind both. In 2013, LA had $1.6 billion in investment funding, compared to $1.5 billion for Boston and $3 billion for New York. In 2014, while LA did increase its total VC funding amount to $2 billion, that lagged far behind Boston’s $2.9 billion and New York’s $4.5 billion in investments.

To start the new year, LA seems to be back on track in keeping pace with its East Coast rivals in terms of total investment dollars pouring into the community.

While Upfront and other local venture capital firms continue to have a strong presence in the region, more capital from outside of LA (including China for that matter) needs to start flowing back into the city. The past five years have seen the region become one of the more influential startup communities in the country, which is pretty impressive seeing that most of the area's innovation took place in entertainment until recently. It seems that we are nearing the end of LA's first act as a innovation leader. Now its time for the recent successes to fuel act two.

[illustration by Hallie Bateman]