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The Venture Process When You’re Outside the Valley (Part I)
By Sarah | April 9, 2007
Given that this blog is called Outside the Valley, it is worth chatting about the venture process when you’re, well, outside the valley. So let’s tackle it: If you’re not in the valley, what role does location play when a VC is evaluating your company as a potential investment?
First of all, it goes without saying that if you are signing up users or selling product faster than you can twitter a sales update (the “train leaving the station”), a General Partner won’t think twice before hopping onto a plane. Sure, the Skype team was based in Luxembourg. But what do you think we did when we saw Skype’s user numbers?
Geography becomes more of a factor the other 98% of the time: when you are less the train leaving the station and more the train still boarding passengers and luggage. And this all has to do with a VC’s favorite word: Risk.
You can think of this in terms of 3 stages:
1. Getting your foot in the door
2. Securing an investment
3. Ongoing support
Because this post will be too long if I tackle it all at once, I’ll address the first stage in this post, and the next two stages in the second post.
Getting your foot in the door:
I am not saying anything new when I say that in the VC world, a face to face meeting is critical. While phone calls and diligence materials add shades of color, from the VC’s perspective, it is meeting the management team face to face that adds the lines to make the colors pop into a picture.
When a start up is in the valley, you need to jump through less hoops to get an in person meeting with a VC because it is relatively easy for the VC. But when a prospective company is more than a one hour plane ride away, the VC can’t help but feel that there is more risk involved because there is more cost for the same perceived benefit. For this reason, when a company is a plane-trip-away, the VC needs more confidence that there is a larger potential outcome for the in person meeting.
This of course is the advantage and benefit of local VCs, especially when you are an early stage company. They just don’t need as much “reason to believe” to get to the point of wanting a face to face meeting. And for this reason, local VCs are a great resource — especially when you are in the early stages of building a business.
But if a local VC is not what you need, how do you get a VC to feel comfortable enough with the risk (i.e., increase their confidence in the potential outcome) that they hop on a plane to visit you?
There are certainly the standard ways: if you have a history with a particular VC or a close mutual contact, or if you have a successful record as an entrepreneur. But if these are not available to you, the factor most in your control is identifying a VC who has already identified your space as one s/he is excited about. If you are an application virtualization company, you’ll have a much easier time scoring a meeting with a VC who has invested in another virtualization company because s/he already have that added confidence in what you’re doing.
In practice, what often plays out is that an entrepreneur who is not located in the valley or equivalent “hot spot” can expect to have to do a road show to where the VCs are congregated – whether it is California, New York, etc., or smartly take advantage of VC congregating grounds like tech conferences.
So in sum, if you’re outside the valley, yes, you’ll likely have to do some extra work/travel. But that does not mean that the due diligence process itself will be any easier or standards will be any lower. The truth is, if you’re someone who can get your foot in the door, you’re going to get you’re foot in the door. Geography comes more into play once you’ve convinced a VC to start considering potentially investing in your company over in his or her head. For better or for worst, geography will certainly come up as a risk in this examination.
More on that later…
April 9th, 2007 at 5:02 pm
Good stuff. The big question is: Will your startup be expected to relocate if the VCs are interested and outside of your geography?
I’m thinking the answer is probably ‘yes’.
April 9th, 2007 at 5:31 pm
Paul, Thanks for the comment. I agree that that is a if not the big question. I plan on addressing it in the next installment…
April 9th, 2007 at 11:06 pm
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April 14th, 2007 at 8:59 pm
[…] my “The Venture Process When You’re Outside the Valley” string. You can find the first post here. (Adam wrote a great follow-on post on how to get your foot in the door which is worth a read.) In […]
April 16th, 2007 at 12:34 am
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