The past couple of months have brought several visible pieces on the opportunity and strengths of Midwestern startups, and underserved ecosystems in general. From Dear Midwest: Stop Trying to Compete with Silicon Valley to The Midwest’s Healthy Fear of Failure Beats Silicon Valley’s Fail Fast Manta to my own piece that I authored with Samir Kaji of First Republic Bank, Why The Micro-VC Surge Will Drive Innovation Across America. These pieces complement some recent events such as Steve Case’s Rise of the Rest Summit which culminated last month in Washington, DC as well as Techcrunch’s recent series on Utah startups, showcasing extraordinary companies not on the Valley’s radar. The ultimate goal in these articles and efforts is to demonstrate the solvency of these secondary markets in their own right and embrace the differences against San Francisco’s startup hub.
For the most part, I agree with the sentiments and arguments of these efforts – yet fear they’re largely irrelevant if no one is listening, or worse, if no one cares. Too much time is being spent on publicizing the obvious – that there’s enormous entrepreneurial opportunity outside of the Valley (and I’m complicit in that as well) – and too little time is being spent on cultivating the real relationships that actually yield results. And respect.
Here’s an example: recently, there’s been a lot of dialogue around the primary role of early stage VCs, with many emphasizing their role of “packaging” companies for future rounds of funding. Although a loose term, “packaging” isn’t pure vapor. It includes helping startups methodically plan and manage burn to hit the milestones the market expects, helping them focus their operations (and vision) to stay on track, and make smart additions to the team to support a focused story. But the most important part of packaging companies for future financing is having strong enough relationships and validation with external parties that an introduction or endorsement to a future investor brings it with automatic credibility. For my money, there’s only one way to do that: a trusted relationship. And, importantly, most venture backed startups in secondary markets will need to tap non-local capital, at the latest by Series B.
I have had a lot of people ask me why myself and the broader CV team make it a point to travel so frequently to San Francisco and spend so much time with non-local investors and operators. Shouldn’t we play our own Midwestern game they ask, and not try to emulate theirs? Shouldn’t we be team players back at home?
There are two fundamental shifts happening in the venture ecosystem that demand a focus on building credibility away from home.
First, traditional growth firms up and down both coasts are being squeezed on pricing by both mutual funds and foreign investors; much has been written already on the commoditization of growth capital. These investors are consequently increasingly looking to the Midwest to gain access to a proprietary deal source that is less correlated to Valley pricing. But like most things in life, it takes years to build networks and they are constantly wondering: whom can we really trust?
Second, as information becomes increasingly democratic, the best entrepreneurs care less about local capital and more about the best branded capital. The world is increasingly connected and good founders from Indy to Omaha can get credible intros to well known Valley firms from the get-go. The truth is though, that this is a mistake. The data I’ve seen suggests that companies that raise early stage capital from local, hands-on partners, tend to outperform those that skip to distant coasts. Many of these funds who might otherwise be intrigued by a Midwest opportunity, would also prefer a local partner with a strong reputation to complement a deal. But again: whom can they trust? Who is credible?
Underserved markets typically suffer from a lack of high conviction capital. But a disconnected or weak reputation can be equally as bad. I suspect the vast majority of entrepreneurs (and investors) fundamentally misunderstand the level of conviction required for a multi-party partnership to get on a plane and travel 2,000 miles. Turn the tables and imagine being the junior partner who convinced their team to leave their families for two days – and having to answer for it if the meetings are a bust.
Building relationships doesn’t happen on an intro phone call or even video chat. It requires in person communication, finding mutual interests, mutual friends, respect. Cheerleading at home is fun, but ineffective if no one is listening. Accomplished entrepreneurs from Scott Dorsey to Godard Abel to Matt Maloney aren’t just “Midwest” entrepreneurs – their presence is strong enough to attract material interest from the national stage back to their home market. But the interest in underserved markets is greater today than I’ve seen at any point before in my 10 years in tech. So who will serve it if that interest doesn’t know where to turn?
The Midwest should be the Midwest. No doubt. But it won’t thrive if it doesn’t actively build bridges and pursue external respect.