One of the investment criteria that I set for K9 Ventures is based on geography. Specifically, K9 only invests in startups where the entire team is located in the SF Bay Area. No distributed teams, no overseas teams, and definitely no companies that rely on “outsourcing” to build their core technology.
When trying to describe this constraint in a more light-hearted way, I often say that “I only invest within 30 miles radius from the Stanford Oval.” Now that last statement is a little off, since I have a portfolio company in Berkeley and one as far south as San Jose. Maybe if I make it 30 miles as-the-crow-flies, it may still hold! I must admit that I do also have some exceptions to this rule — LucidChart is based in Provo, UT, and Occipital is presently in Boulder, CO. But, in both those cases, I’m still working hard on getting them to move here!
I’ve already written about why I want the whole team to be in one location, but in that post, I didn’t address why I want the entire team to be in Silicon Valley. I get a lot of push-back on this point. Almost every day, if not every other day I have to explain my rationale for this. So I figured it’s about time to put this down into a blog post.
Most people, and especially those outside the Valley, think that the reason for this geographical constraint is because “Investors are lazy,” or, “They want their portfolio companies to be within driving distance.” I’ll admit that I am not a fan of getting on a airplane, but my reason for hyper-local investing has nothing to do with either of these common misconceptions.
There may indeed be some lazy investors, but I have yet to come across even one amongst all those that I have met in the Valley. They wake up earlier than a lot of entrepreneurs do, and, I get a lot of late night emails from VCs working through their email inboxes late at night. I’m not saying that VCs work harder than founders do, but they’re not slacking off either. And, even though I do enjoy meeting up with the founders in my portfolio for lunch every couple of months, the majority of the interactions with my portfolio founders still happens over email or phone. I suspect this is also the case for most VCs. So why then do I still insist on having the startups being located here?
- Serendipity: There is a serendipity to the Valley — things happen because you are here. It may be something as simple as you’re walking down University Ave in Palo Alto, and bumping into someone you know. You may chat for just two minutes, but in those two minutes, he/she may say something useful, or suggest you meet someone else. It’s that casual interaction that makes things happen. This serendipity is why startups in the Bay Area have a higher chance of success than those located elsewhere. Until you experience this first hand, it’s hard to describe. It is even harder to quantify, and you can argue against it all you want, but this is the single biggest reason why I want the startups I work with to be located in the Valley.
I’ll give the example of the acquisition of CardMunch by LinkedIn. Before CardMunch even launched its product, I ran into some folks from LinkedIn at an event and in casual conversation mentioned what CardMunch was trying to do. A few months later, after the product had launched, the CardMunch team went to an event, and happened to run into an engineer from LinkedIn. Again a casual conversation transpired. This happened on at least 3-4 different occasions, until one day I get a call from a friend at LinkedIn wanting to talk about CardMunch. When we were starting the company, we had speculated that this would eventually be interesting to one of two companies: LinkedIn or SalesForce. We did not expect to attract their attention this early on, but the serendipity of being in the Valley made that happen.
- Funding environment: No one can question that Silicon Valley has the most developed venture capital and funding environment for startups. Even the place that ranks second to the Valley (arguably New York, which has overtaken Boston) is a far cry from how active and developed the funding environment here is. There are more venture capital funds, micro-VCs, super-angels, angels and incubators in the valley than probably in the rest of the world combined (exaggerating to make a point). The plethora of funding sources for every stage of development of a company makes for a very efficient funding environment.
After being in the Valley for almost a decade, I now say that there is no such thing as a capital efficient company here — only companies that attract capital and those that don’t. But, if you are a company that attracts capital, there is no place better for it than Silicon Valley.
- Eco-system: Experts of allkinds are here. They are the best in the field, and the best in the world. Lawyers. Technical experts. Designers. There is a culture of helping. A culture of paying it forward. A culture of re-investing. In fact, some would argue that it is this culture of re-investing that has made Silicon Valley the powerhouse that it is today. And to top it all off, the eco-system in the Valley is exceptionally fluid, i.e the flow of information and connections happens quickly and efficiently.
I often meet founders from other cities who tell me that they already have a strong network in place in their hometown and moving here would mean that they would have to start from scratch. My response to them is always the same: “Don’t make the same mistake that I did.” That was exactly my reason for not moving to the Valley sooner. Having now been here I’ve seen first hand just how quickly entrepreneurs get plugged-in into the eco-system. Within a short period of time, the network that you build here in the Valley will be orders of magnitude richer and more useful than what you may already have elsewhere. The combination of your existing network plus your Valley network can prove to be even more potent.
- Respect for Effort and Learning: Folks often say that the Valley tolerates failure — that here you’re allowed to shoot for the moon (or chase windmills) and it’s okay if you fail. In my view, the Valley often swings too far with this one. People start to glorify failure. IMHO it is not a tolerance for failure, but a respect for the lessons that can be learned from failure that matters. If you figure out why you failed, that does not mean you’ve figured out how to succeed. But like learning to ride a bicycle, if you fall down once, in the Valley you’re not told that you’re not cut out to ride a bicycle. Instead, there are people here who will help you to get back on the bicycle and try again — provided you learned something from falling. Having a healthy respect for effort and learning is important. The Valley has that.
Put simply: “What happens in Silicon Valley simply doesn’t happen anywhere else.”
I did my startups in Pittsburgh, Pennsylvania. They were both highly successful. We beat the odds of being able to raise angel money in Pittsburgh, and we built an awesome team on the shoulders of graduates from Carnegie Mellon and by selectively stealing away the best talent from other local companies. Don’t get me wrong. I love Pittsburgh and I especially love my friends, co-workers, advisors, mentors, and investors. I love Carnegie Mellon — it is by far one of the most academically rigorous schools you could attend. Andrew Carnegie’s quote of “My heart is in the Work” is engrained into the soul of every graduate from Carnegie Mellon. But, now looking back, with 20/20 hindsight, if there is one thing I would do differently, I would move to Silicon Valley the day I decided to do a startup.
The Valley has a 10x multiplier to anything you do. Take two companies doing the same thing, having similar technology and I’ll bet that the company that’s located in the Valley will be 10x the size, or 10x the revenue, or whatever other success-metric you want to apply. For the four reasons mentioned above – the serendipity, the access to capital, the eco-system, and the tolerance for trying again and again till you succeed — the Valley outperforms.
Doing a startup is hard. Really hard. You have enough things working against you. Geography doesn’t have to be one of them. That’s an easy one to fix (even if you are in a foreign country and have visa issues, just remember that the mark of a true entrepreneur is resourcefulness. Real entrepreneurs find a way to make it work. In fact, real entrepreneurs will make it work even outside of the Valley). You want to stack the deck in your favor by at least being in a location where you have a higher likelihood of success.
As my friend, mentor, and one of my favorite people in the world, Jack Roseman (author of Outrageous Optimism: Wisdom for the Entrepreneurial Journey) once said to me: “If you want to be an actor move to Hollywood.”
Implications for investing: As a venture fund, if you’re in Silicon Valley you probably have ample deal flow to where you can focus on primarily investing in companies that are located here and still build an awesome portfolio. If you’re a venture fund outside of the Valley — even if you’re in Boston or New York, chances are you’re going to have to broaden the net. It’s a simple density/deal flow issue.
Likewise if you’re an LP, you have to make sure you have reasonable exposure to Valley investments. While I haven’t done a scientific analysis of this (LPs can afford to hire someone to crunch the numbers for them!), I would argue that venture funds that invest in startups in Silicon Valley have better returns than funds that use a regional-only philosophy (for a non-Valley based venture fund).
For me, and for K9 as a micro-VC fund with a solo-GP, the hyper-local investment strategy makes a lot of sense. Take all the reasons above, and add to that I don’t have to travel to find great investment prospects, which also means I get to spend that time instead helping portfolio companies, looking at potential new investments, or writing the occasional blog post
Clarifications: Before people start assuming some things that I am not implying in this post, I figured I should clarify a few of them. This post doesn’t mean that you can’t build a hugely successful tech company outside the Valley. There are numerous examples of those. It does imply that your odds of success may be better here. For investors, this post doesn’t imply that Valley investors are in any way better than investors who are not based in the Valley — but that they might just have better pickings in their backyard. In fact, some of my favorite investors to work with, and many of my advisors and mentors, are not in the Valley.
As an entrepreneur, your mission, should you choose to accept it, is to maximize the chance of success of your startup. Whether that is in Silicon Valley, or Timbuktu, or anywhere else, that is for you to decide.