OK I admit it. I hang out mostly in two of the biggest tech startup communities ever, which are Silicon Valley and NYC. So when I blog about what I see, it is most often through the lens of someone who experiences the tech startup/investing ecosystems of those two places and not much of other places (NOTE: I do hang out in Los Angeles a lot too, but haven't invested much there).
So yeah, I'm a Silicon Valley/NYC tech investing snob and when I write my snobbiness is evident and the facts are biased towards what I see in those two places with respect to tech and internet. Unfortunately, as I'm often reminded by folks, other sectors, and places in the US and the world have much different ecosystems. What are those differences?
1. Availability of capital is not as easy elsewhere. I wrote in my post What Startups Need Most Of Today that startups don't need more of funding. Well, unfortunately that seems to only apply to Silicon Valley and NYC where for tech/internet startups this is true. For other types of startups, it can be a dry world indeed.
But there is hope. Thanks to Mark Suster who pointed me to A Moveable Feast of Mugs, Maniacs and Masters of the Game - David B. Lerner:
* Not all angels live in Silicon Valley!
* Not all angels are interested in consumer internet companies!
* There are vibrant angel communities in NYC, Boston and in other cities around the US!
* Angels account for 90% of all start-up funding in the US!
* Angels put up $20 Billion a year into approximately 50,000 startups!*
* Friends & Family put up an estimated $60 Billion a year into startups!*
* There are an estimated 225,00 angels in the United States*
* There are currently ~300 active angel groups in the United States*
Source: Angel Capital Association
According to this, perhaps funding IS NOT so scarce. However what makes funding scarce could be:
a. Networking to funding is tougher in other areas. In the SV and NYC, there are so many people investing and working on startups that it's so much easier to bump into someone who can help you network into a pool of entrepreneurs or investors. I can believe this is much harder elsewhere if the networks are much more spread out or less organized, or startups are just not nearly as common as they are in SV/NYC.
b. The filters that investors put on startups before investing is a more conservative, traditional filter than for in SV and NYC. By conservative and traditional, I mean they want to see revenue and business plans and progress before funding; in SV/NYC, it is more likely that you can find investors to bet on you simply because you're smart and energetic, and/or your idea is innovative but still has an unproven business model. Again this applies mostly to tech/internet startups; for other sectors, I find that the crowd tends towards the more conservative filters.
c. The experience base tends towards other sectors in other parts of the country. Thus, unfamiliar sectors may find funding very very scarce simply because the investor pool generally likes to invest in things they understand or have prior experience in. Here in SV/NYC, you can find many people who made a lot of money through the internet booms and have extensive experience building internet projects. But these guys rarely invest outside of the internet; so the opposite is true here in SV where if you're working on something non-tech/internet, you could be very frustrated at seeing all these internet "dipshit" startups getting funded while you, with a really cool non-internet idea, can't find anyone to bet on you.
2. Following on the networking comment, it is also much easier to get help as an internet/tech entrepreneur in SV/NYC. You can more readily find help here in SV/NYC as the available pool of entrepreneurs and helpful investors is higher. But if an internet/tech entrepreneur goes elsewhere, it could be very hard to find help. Also note that there are places where tech/internet help is building, like the cities where Techstars is popping up. For other sectors, this may be also true in SV since the variety of startups that are worked on here is very great. But for other parts of the country where the concentration of a given sector's startups may be scarce, it could be very hard to find help.
Help can also come in the form of business contacts. If you're in starting a company in a place where there are few or no others also working in that industry sector, then you will have to fly to find these contacts and that makes finding help harder.
3. Hiring can be *really* tough elsewhere. It seems the cream of the crop of software engineers ends up in SV with the dream of working at Google, and then some head to NYC area if they like that atmosphere. Generally, around major universities or major metros is where hiring is best. However, parts of the country which don't have major corporations of a given industry sector or are less desirable places to live (by whatever metric people use to choose) can make it abnormally hard to hire. At least universities seem to be graduating a ton of software engineers; compare that to the number of biomedical, mechanical, civil, nuclear, etc engineers that graduate. Then remove those that are unsuitable for startups, either mental makeup, attitude, life stage, etc., and your pool gets that much smaller. It's tough enough hiring for tech/internet startups; I can't imagine what it would be like for other types of startups.
Is there hope for other parts of the country? I think the answer is sometimes:
1. Places like Chicago (Excelerate) and all the Techstars cities are forming their own entrepreneurial centers and incubators for internet/tech startups. But they are the new generation. If you Google a city plus the word "incubator" you can also find many tech incubators already in existence. But those tend towards non-internet tech and more traditional ways of thinking and building businesses, which are different and potentially not as effective for internet businesses. Meetup.com is allowing entrepreneurs and startup people to form little to big networking groups.
However, I am not sure that forming more incubators for internet startups is the right way to go. I have seen startups coming out of incubators that were very similar to other existing startups. I also think that the ease of competitors popping up means that finding something truly unique to work on is getting harder and harder. So somebody has to realize that as they are picking companies. So far, Ycombinator who has been around the longest seems to be picking and directing startups to work on really innovative stuff (and unfortunately there are always those that end up after their brief YC stint with not so exciting and innovative startups or those that are very feature based).
At the very least this suggests to me that new incubators need to do a better job of realizing what environment they are operating in and helping/fostering/directing their entrepreneurs to build really innovative stuff versus stuff that already has competitors.
2. One of the biggest issues I see with doing internet startups elsewhere besides SV or NYC is that while you may think you are working on a great idea, it is highly likely that someone else is already working on it. This is a big problem where entrepreneurs don't look around the competition hard enough to know who else is working on your problem.
As an investor, I am extremely sensitive to competition in the internet only space. If you are working on something similar to something in SV or NYC, I may naturally pick the one in SV or NYC simply because of the environmental factors that will give them edge over someone who is not in those locales. Outside of internet, I think the world is nowhere near as competitive because it is much harder to create a me-too startup in other industries.
3. I sometimes meet investors in other places who lament that they can't find good startups to invest in. It seems that they see all this money being made in internet startups (mostly all in SV or NYC!) and they want to get into the game. A couple of responses:
a. Sometimes they don't have experience in internet businesses. This is a big problem as it increases risk that their lack of experience could mean they will bet on problematic startup plans. In this case, I think it will be better to find a fund to invest in who specializes in internet/tech.
b. Investing in startups not near you brings it's own problems. How do you keep tabs on them? How do you know what they are doing? Are they squandering your money? You can't take a ride over and talk to them. Stick to investing in startups you can get to easily, or at least in places you frequent in.
But yeah it sucks if there are no startups near you, or at least not in the hot trendy sector at the time....
c. I still maintain that the risk profile for internet only startups is extremely high even if it seems that people are making a lot of money on them. The ship has, unfortunately, sailed for many opportunities. Newly created internet startups tend to be incremental improvements on existing services, or those that attack a niche market whereas the giants attack the overall market. The success probability for an investor in these startups is going to be really tough. Returns will be lower because many of these businesses are doing cool stuff, but are attacking markets smaller than giants who are attacking the overall market; therefore, the exits on these will be most likely sub-$100MM.
So should you jump in? I think internet is going to be an opportunity trend, just like microprocessors and personal computers (and the list can go on). People bet on these trends and they lasted for a long time but now they have topped out and it's hard to find those game changing huge bets in those areas. With the internet and its ability to launch things with very little capital, I believe the internet has raced up to topping out and will continue to make it harder to find really game changing, super exits that we all want. Soon it may be hard to even get worthwhile exits in the mid-$10MMs (and by the way, the economy still sucks which further suppresses exits, as well as the lackluster IPO market).
I would say, wait it out. There will be another trend coming soon and you should hop on that. Or find some venture fund to help you get into internet startups but I still think it is an area fraught with peril for venture returns.
So OK, I'm a Silicon Valley/NYC tech investing, blogging snob. And the reality is, where there is easy money, help, community and resources like in SV, NYC, and maybe some other up and coming areas, then startups and investors will flourish. Like for the movie industry - if you're going to make a movie you wouldn't go to Indiana right? You'd go to Los Angeles where there was money/help/community/resources for movie making (or maybe NYC). If you wanted to be a music star, you'd probably want to go to LA, or NYC, or if you were a country music star you'd end up in Nashville.
The world isn't fair. We congregate in a place, make it a mecca for something (startups, movies, music, etc.) and it becomes THE place to go to become successful in it. But we want other places to be like that, like maybe where we are living right at this moment. We don't want to move; we like living where we're living now. But the fact is, sometimes the rest of the crowd congregates elsewhere and makes it mecca for something like startups and investing whether you like it or not. Participating from afar really isn't as effective as just going there and living it.