In the face of last week's election, many in the Valley and in the technology and venture capital industries are asking what happened, how do we respond, and what can we do to bridge the gap between the haves and have nots. I published the following with my thoughts, Tech Jobs Wages 5x Non Tech, Tech Job Creation Requires Access VC$, Red States Need Access to Capital. The post is a call for the venture industry to invest beyond CA, MA, and NY in order to share not only access to capital but access to the income and job growth that comes with risk capital.
My friend and founder at PivotNorth Capital, Tim Connors, read the post and sent me his thoughts. Tim is not only the founder of a successful firm, but he is a longtime industry veteran with experience at Sequoia Capital and USVP. Tim's post centers on how to build local tech ecosystems, how to execute on a pan-US investments strategy, calling for both direct investments but perhaps more importantly portfolio company investments in functional areas beyond the Bay Area (telesales, etc). Tim kindly allowed me to publish his thoughts on my LinkedIn blog....please find them below. Thank you, Tim.
How to Turn your City into the Next Silicon Valley
By Tim Connors
Many cities are eager to build the next Silicon Valley. But most fail at it. It is much simpler to pull off than you think, but most don’t do it right.
Venture Capital delivers great returns to Limited Partners when folks with “the recipe” fund founders with the recipe. i.e. funders who have been through high growth startups as operators fund founders who have been in high growth startups prior. The biggest issue in new geographies is nobody has the recipe yet, neither the funders, or the founders. Getting your first winner in a geography is the hardest. It requires some luck. But there are things you can do to make your own luck.
Take Bozeman, Montana as a great example:
- 15 years ago, there was no startup ecosystem in Bozeman.
- Greg Gianforte starts RightNow Technologies in Bozeman and turns it into a big winner with Oracle buying it for $1.5B. Greg was a pioneer. From an economic perspective, it really made no sense for greg to try to build RightNow in Bozeman. Bozeman, like any other new geo, was not the easiest place to build the first big startup in a town. There were no founders or funders with the recipe in Bozeman. So Greg had to bootstrap with no outside funding, he had to build it up slowly with customer collections. He had to train his own engineers out of Montana State University rather than being able to hire folks with the recipe out of other successful companies, in effect running his own CS masters program inside RightNow. He had to fund and rewrite the curriculum for the undergrad CS department in town at MSU. He had to recruit in most of his talent from out of town as the “been there, done that” skills weren’t available in town. With hard work and some luck, he produced a big winner.
Now there are 500+ people in Bozeman who were with RightNow in the big growth years with the recipe. The top execs from RightNow, including Greg, have the capital from their equity to "uncle joe" fund companies. Uncle joe rounds are $250k-ish rounds that allow a 1-3 person team to get started to build their startup
Greg and his top execs are funding the next 200 folks from RightNow who are now spinning out and starting companies. Now that they have been through a high growth startup, they have the recipe, and their funders have the recipe. They know how to build a rapid scale business, they know how to build scalable technology, they know how to scale sales organizations, etc.
Now VCs from Silicon Valley are moving to town and following those “uncle joe” rounds with Seed rounds of $500k-1M. Will Price who apprenticed at Hummer Winblad is now running Next Frontier Capital in Bozeman and finding lots of great opportunities. A funder with the recipe funding founders with the recipe.
The founders’ past successes and Will’s track record and relationships from Silicon Valley are now attracting Silicon Valley VCs to fund the $5M Series A rounds and the $15M Series B rounds to fully fund the companies. Capital isn’t a bottleneck in Bozeman now. Capital will always find founders with the recipe, and it has in Bozeman.
So now the flywheel is spinning in Bozeman. Dozens of new startups emerge out of each successful startup, and the collective experience of the first winner allows them to have high success rates. Probably 20 startups have emerged out of RightNow that have “uncle joe” rounds. Assume 10 of those attract $1M Seeds from Will and others. Of those, 5 will attract Series A, and 2 of those will attract Series B and go on to be big winners. 1 winner creates 2 more winners, 2 will then create 4, 4 will create 8. Repeat, repeat, repeat
So how does a government economic development group find your Greg Gianforte to try to start the flywheel in your town?
A few ways:
- Fund two people to help. One based in the bay area. One in your city. Most bay area companies are finding it expensive to do all engineering in the bay area so they mostly have distributed engineering teams now: VP Engineering and some engineers in the bay area, the rest in remote geographies in the US or elsewhere. So hire one person on the ground in your town with a tech recruiting background who helps identify the credible engineers in your town, the folks who have the skills to work for startups. Then have your second hire be based in the bay area, helping the hottest startups in the bay area find your engineers in your town for their distributed teams. These engineers end up with very high paying jobs, and they learn the recipe. They work for a bay area-based company that becomes successful and earn the recipe, then they go found a company in your town using the value of the equity they earned at the startup for a self-funded “uncle joe” round.
The second area that silicon valley companies are realizing is too expensive to do telesales in bay area. So have your recruiter identify folks who can be credible telesales leaders in your town. And have your bay area rep try to help them land with startups who want to build telesales in other regions. Again, when those folks have success in a bay area based company, they will have the recipe and capital to partner with some local engineers to build a local startup.
The bay area rep can also help identify folks who come from your region but have moved to silicon valley, and encourage them to “come home” and found their next startup back in the target geography.
They can also attract funders. A Series Seed funder in the bay area is unlikely to want to do deals out of town. But if they are from your city, you may be able to encourage them to look at deals in your town. Same for alums of your local college. If someone graduated from your city’s university, they will be drawn back to help. Once startups get past the seed stage, funders of the Series A and B rounds will invest anywhere into credible teams. So you just have to get things kicked off.
If you have economic development funds, work to attract someone like Will to your town. Someone who has been both operator and successful VC. Fund them as an LP. Most economic development groups end up direct investing in companies which is a mistake. Put your money instead behind successful VCs with the recipe. That will work out much better. If you can’t find a Will willing to come to your town, fund some of the top MicroVCs in Silicon Valley, and simply ask that they come to your city once a quarter. If they do that, they will find deals there.