The steady pace of venture-backed Enterprise startup exits makes the sector the bedrock of a healthy technology ecosystem.

The recent IPO of GoodRx marked another mega liquidity event for a Southern California startup, with the company going public at a monster valuation of $12.7B. Of course, this is on top of the already stellar outcome that GoodRx’s venture investors saw in 2018, when the company was acquired by a consortium of private equity firms in a deal that valued the company at approximately $2.8B.

However, there is another recent LA exit that should have members of the local startup ecosystem just as excited. In August, local cybersecurity company Signal Sciences was acquired by Fastly for $775m. Although the valuation was not as high, the exit is an important milestone for the building momentum of Enterprise technology startups in Southern California.

For many years, Southern California’s technology sector has been derided as overly focused on building consumer and media companies, at the expense of enterprise software and “hard tech” companies. However, in many ways, the region’s recent resurgence as a startup environment was kickstarted by the IPO of enterprise talent management software provider Cornerstone OnDemand in 2011. Cornerstone was founded during the peak of the Dot Com bubble. The Los Angeles tech startup ecosystem largely withered around it in the subsequent decade, despite some notable exits such as Overture, Applied Semantics, and MySpace. Cornerstone’s exit helped ignite a spark of life at the beginning of the decade that has been building ever since.

Having a strong pattern of Enterprise startups exits is important for building a solid, sustainable base for a technology ecosystem. For geographies outside of the Bay Area, one of the largest challenges facing founders is not necessarily finding customers or engineers, but finding the management talent that has seen rapid growth before. Finding a viable VP of Sales or VP of Marketing can be quite difficult when you can’t draw from a pool of local success stories. For newly started companies, angel investors whose wealth comes from the mainstream tech sector tend to offer better advice and connections to help prepare a company for traditional venture investment. These executives and investors become more common as a region sees more exits, and nothing produces exits like Enterprise tech.

Research from Sapphire Ventures suggests that not only are Enterprise exits more frequent than Consumer exits, but that returns in the Enterprise sector are more broadly distributed than those in the Consumer space, which exhibits even stronger power law effects. Importantly, Sapphire Ventures noted that the top 50 Enterprise exits over the past 25 years generated 38% of the returns for the space, compared to a staggering 74% of all returns for the top 50 exits on the Consumer side. This concentration of outcomes is even more extreme considering that until recently far more seed investments were made into consumer companies than into enterprise companies.

Simply put, there are roughly 2 consumer exits per year in the entire United States that drive the majority of B2C value creation. Southern California has certainly been a beneficiary of this extreme power law of consumer exits — Los Angeles-based Snap was was the largest exit of 2017 anywhere in the United States. But even Los Angeles does not yet have a large enough startup ecosystem to reliably produce Snap-sized outcomes in the Consumer sector. Southern California (stretching from San Diego to Santa Barbara) has averaged roughly 1 unicorn consumer exit per year over the past decade, and none have broken the mythical $10B barrier at their initial liquidity event other than Snap.

An analysis of exits in Southern California dating back to 2010 shows the difference in exit distributions between Consumer and Enterprise startups to be true here as well. Since 2010, Southern California has seen approximately 75 Consumer exits with an announced or publicly available exit price. Together, these exits account for $50.5B in value. The top 10 companies in this set account for over 80% of the value created. Snap’s IPO alone is responsible for 40% of the total.

 

In contrast, Enterprise exits have been more frequent and show a less extreme power law in exit valuations. Over the same 10 year time frame, Southern California saw approximately 165 enterprise exits with publicly announced valuations, totaling just over $33B. This is certainly a much small number than the $50B in exits notched in the Consumer sector. But the top 10 exits only accounted for 46% of total value, compared to over 80% for Consumer’s top 10:

 

This includes CrowdStrike, a company which now touts a Silicon Valley headquarters, but which spent its formative years in Irvine and had local Orange County investor Okapi Ventures as one of its early backers. Even without CrowdStrike, Enterprise exits in Southern California have totaled almost $27B. Without CrowdStrike, the distribution of Enterprise exits in Southern California becomes a bit more even distributed, with the top 10 Enterprise exits accounting for only 35% of aggregate exit value. In total, there were 72 announced Enterprise exits of over $100m, compared to only 30 Consumer exits of the same size.

 

While the more even distribution of exits in the Enterprise sector might be less exciting than the homeruns on the Consumer side, these exits represent the bread and butter of a healthy ecosystem. Talent and capital needs to recycle. Each of those exits represents a a set of successful management teams that can take their skills to new companies, possibly with newly crated wealth to act as angel investors as well.

In Southern California, this local recycling of talent and capital has been noticeable in sectors like cybersecurity. One of Open Raven’s co-founders was previously the Chief Product Officer of CrowdStrike. Obsidian Security was founded by former Cylance executives. And the founders of Signal Sciences have invested in local cybersecurity companies like Britive. Likewise, the San Fernando Valley has become a battleground for accounting close software, with upstart FloQast taking on local incumbent BlackLine. Naturally, FloQast’s founder first observed the problem with the accounting close process while working at LA’s own Cornerstone OnDemand. Other examples of this cycle abound, not jut in Southern California but in other strong tech geographies like New York and Seattle as well.

This is not to say that the Consumer sector is not important. Nothing attracts outside talent and outside capital to a new geography like the promise of a multi-billion dollar company that fundamentally changes consumer behavior. There is no doubt that these Consumer grand slams do drive a significant portion of overall venture returns, and that successful Consumer companies build talent which can filter to other startups. However, for entrepreneurs, investors, and other stakeholders interested in building a regional technology industry to be healthy and sustainable, the more consistent Enterprise sector needs to form a significant portion of new company formation. Southern California has spent years building this foundation, and is now reaping the rewards with one of the most dynamic cohorts of startups that it has ever had.