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The Venture Process When You’re Outside the Valley (Part II)
By Sarah | April 14, 2007
Securing an investment:
This is the second installment to 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 this post, I’ll discuss the second stage: “Securing an Investment”. (Sorry – I’ll have to cover the third stage – “Ongoing Support” in a separate post.)
i.e., If you are based in North Dakota, have your foot in the door, what role does geography play when trying to seal the deal?
To answer this, it is useful to take a step back. A VC’s job is to take on risk with the hope that the gamble is a good one. Inherently, this means trying to minimize risks you can control. So when a VC is consciously or subconsciously running through his or her laundry list of risks — gut, market opportunity, management team, technology etc. — geography is an unavoidable consideration.
Many entrepreneurs probably assume that this consideration comes in the form of: “Do I really want to fly to Fargo, North Dakota for every board meeting?” And for many VCs, this is a consideration. (You can bet that this will be more of a consideration for a veteran VC with a solid track record than for a greenhorn VC who is out there aggressively looking for the best deals no matter where they are.) But regardless of who the VC is, there will be other considerations in the VC’s subconscious screaming something quite different:
“The company hasn’t had any growing pains yet. But are there enough talented engineers in Fargo to build this company to 20 people? 50? 100?”
“What if the company realizes it has to move and the CTO decides she doesn’t want to leave?”
“The founders think they can address the resource problem by growing virtually – but will they be able to build a strong and self-sustaining culture?”
“What is the exit strategy going to be? If they pursue the public markets, are they going to have to move?”
etc. etc.
Inevitably, these questions boil down to the question “Will this company have to move?” Moving is a risk. But staying put might be a bigger risk. Moving is expensive. But not moving might have too high an opportunity cost.
Does this mean any city outside of Silicon Valley, Boston, or New York is out? Of course not. There are many geographies that are not VC hotspots but nonetheless flip these concerns into positives. Take Ottawa, for example: An amazing high-tech legacy and therefore, a deep bench of talented (cheaper) techies. Combine this with Canada’s generous R&D tax credits and Ottawa is a great environment to nurture a start up. But just 2 hours away by car, in Montréal, a VC would be faced with the risk factors listed above. Consequently, the CEO of a Montréal based company would have a little more of an uphill battle than if that company was based in Ottawa.
This is even more true if the Montréal company is already feeling the strains of finding talent and realizes they are going to have to move sooner rather than later or suffer delays. In this case, the Montréal team is going to need to find a VC that is willing to invest at a risky inflection point. But if the team instead is three years away from having to move, and has a well thought out plan explaining this timing, then the VC will likely be prepared to side table their geo-concerns and cross that bridge when you get there.
So what’s the summary? What role does geography play?
You’ll automatically have a small set of VCs who would consider investing in you. But take heart — all it takes is one investor to get excited enough in you to make the investment.
If you are realistic about the benefits and drawbacks of your current geography, and have a plan to maximize the benefits, minimize the drawbacks, you’ll be able to downplay the risks your geography plays to your potential investor.
April 18th, 2007 at 4:32 pm
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