Tag - fred wilson

Why the Micro-VC Surge Will Drive Innovation Across the US
The Hidden Challenges of Starting a Company in Secondary Markets
Dear Brad, Fred & Mark: How The Hell Do You Do It?

Why the Micro-VC Surge Will Drive Innovation Across the US

The following was co-authored by Ezra Galston of Chicago Ventures(@ezramogee) and Samir Kaji (@samirkaji) of First Republic Bank.

Over the last several years much has been made of the opportunity, or perceived lack thereof in technology centers outside of the Bay Area and NYC. From Steve Case’s Rise of The Rest Tour, to Google for Entrepreneurs, to Brad Feld’s Building an Entrepreneurial Ecosystem , the discussion has consistently been overwhelmingly positive.

It’s easy to understand the stance as who wouldn’t want to support entrepreneurship, irrespective of geography? However, it’s hard to discern whether these opinions were borne out of a utopian desire or a sincere belief of true financial viability in markets outside of NYC and the Bay Area.

In Fred Wilson’s widely discussed (and debated) piece “Second and Third Tier Markets and Beyond,” he suggested that the opportunity outside of the Bay Area was significant, citing the successes of USV in New York, Upfront Ventures in LA and Foundry Group in Boulder:

“The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

There is a supremacism that exists in the first and second tiers of the startup world. I find it annoying and always have. So waking up in a place like Nashville feels really good to me. It is a reminder that entrepreneurs exist everywhere and that is a wonderful thing.”

In an effort to move past anecdotes however, we wanted to explore one of the components that helps drive and catalyze early entrepreneurial activity in any localized geography — the availability of early stage funding.

Simply put, non-core US tech hubs are reliant on local early stage capital to subsist since seed stage fund sizes often make remote investing impractical (by contrast growth stage investors who manage large funds and have significant resources can easily invest in breakout companies outside their region).

With the hypothesis that quality local seed capital is needed to foster a strong entrepreneurial ecosystem, our analysis is centered on whether the MicroVC surge, has provided (or may provide) a material impact to these “2nd and 3rd” tier US geographies.

Fortunately, there’s good news for entrepreneurs everywhere. Of all of the Micro-VC funds raised since 2010 (this number includes firms currently raising funds), over 40% of Micro-VC’s formed were based outside of the country’s largest tech centers of SF, LA, NYC and Boston, a number we found quite surprising.

In total, those Micro-VC funds raised outside of the four core tech centers since 2010 represent $6.7B in investable capital, the vast majority of which have driven significant investment dollars in their geographies.

More important to note is that the opportunity in these secondary ecosystems is unequivocally noteworthy. Using M&A activity as an evaluation metric, these ecosystems, despite a relative dearth of funding, have performed quite well:

In each year dating back to 2010, the percentage of Micro-VC funds raised outside of SF, LA, NYC and Boston materially lags the volume of M&A activity, on % basis, in those same areas. This suggest that Micro-VC funds located in secondary markets face less competition — and proportionally more opportunity — for strong financial outcomes by betting on that delta. Now, it’s true that these opportunities are a bit geographically dispersed, however it’s clear that certain cities (Seattle, Boulder, Austin, Salt Lake, Chicago) have made great strides in developing great entrepreneurial talent.

This dislocation in M&A proportionality is of course amplified by the concentration of funds in the Bay Area and NYC. Because coastal deals are more competitive due to an oversupply of capital, they boast higher entry prices (valuations) than do deals in secondary or third tier markets — and the effect on a returns basis may also be material. Case in point: according to Angelist, the mean valuation for deals in Silicon Valley since 2010 is $5.1M. That compares to $4.5M in Chicago, $4M in Indianapolis, and $3.7M in Detroit — offering Midwest investors anywhere from a 10–30% discount at entry.

There are other ways of interpreting the data. One could argue that Bay Area deals deserve to be higher priced due to a premium in the quality of founding teams. Or that the pure volume of M&A in the Bay Area and Boston de-risk the level of returns variance for any particular fund. Those arguments may be with merit but are also balanced by data released by Pitchbook that show cities such as Chicago, Seattle and Washington D.C effectively comparable on a multiple of returns basis:

It is nearly indisputable that large technology companies are being built and enormous value is being created outside of the coastal venture markets: examples include Grubhub, Groupon, Domo, Qualtrics, ExactTarget and HomeAway. But these markets will require more patience for company maturity, a willingness by fund Limited Partners to accept greater short-term volatility, and conviction that key talent will stay in non-core markets due to a desire of staying local and the avoidance of the high cost of living present in the major US tech centers.

While the rhetoric around non-core markets has been historically positive, it appears that the early stage capital surge through Micro-VC funds may be a major factor in these areas actualizing on their potential.

Extra special thanks to Peter Christman for his tireless work in helping to analyze, aggregate and process the data underlying this article.

The Hidden Challenges of Starting a Company in Secondary Markets

Fred Wilson’s much debated post, Second and Third Tier Markets and Beyond, sparked an important discussion about operating and investing in businesses outside of the Valley. Case in point: within 48 hours, the piece generated a heated Twitter exchange (including input from the one and only Bill Gurley), a Pitchbook analysis of the best M&A outcomes by region, and even a capitulation of sorts from Fred.

Wilson identified a couple of important challenges of building in these markets, namely lack of conviction, lack of money, lack of infrastructure, and shallower talent pools:

But there is a dynamic that goes on in these third tier markets where the local investors look to investors in the first and second tier markets to come down and “validate” their investments. And the investors in the first and second tier markets won’t come down and do that without a strong local lead. This game of “chicken” happens ways too often in these markets and is incredibly frustrating to entrepreneurs in these markets. These third tier markets need a few strong Series A focused VC firms who have large enough fund sizes to be aggressive lead investors and also have the conviction and stomach to play that game. That is what USV, and Flatiron before it, did in NYC. That is what Foundry did in Boulder. That is the game Upfront is playing in LA. Every third tier market needs a few VC firms like that. And being that investor is a terrific way to make a lot of money.

The truth is you can build a startup in almost any city in the US today. But it is harder. Harder to build the team. Harder to get customers. Harder to get attention. And harder to raise capital. Which is a huge opportunity for VCs who are willing to get on planes or cars and get to these places.

And his insights are a good start. But as someone who’s lived the Chicago startup scene since moving here in 2007 to help build CardRunners Gaming, I’d like to suggest three other non-obvious challenges of building companies in secondary or tertiary markets. This is a tough love blog intended to provide guidance within secondary markets and enable founders to actualize their potential. If you can get through it and internalize it, it’ll make you stronger.

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The Press Challenge

Although the press outside of SF & NY may not be bulge bracket publications, they are nevertheless not constrained either by distribution (digital solves that), nor by space. But they are constrained by a dearth of quality stories. Meaning that Chicago, for example, has a finite number of private unicorns or venture backed IPOs – so, if you want a quote from the CEO of a Chicago unicorn company for example, you’ve got finite people to call.

The effects are that it can force a cycle of manufactured, often unwarranted positivity, feature stories, even local awards on companies that are downright unproven or even floundering. Moreover, it enables certain founders, especially those with a natural PR inclination, to run from magazine shoot to newspaper interview to conference to panel and back, all the while ignoring the actual company they’re supposedly running. It’s akin to Mark Suster’s admonition to Be Careful Not to Become a Conference Ho: “If you’re a startup CEO — don’t kid yourself. Get back to work. There’s a team in the office in need of your guidance.” But that warning is amplified in secondary markets where founders – sometimes entirely unproven, even occasionally on the brink of shutdown – are paraded around by the press, conference organizers and awards shows as local heroes.

PR is a wonderful tool and an extraordinary opportunity for the right situations (building a story for hiring, consumer marketing, etc). But it is a challenge to ignore the phone when the press circuit is continually calling. Local founders must learn to say no at the formative stages of their business.

The Self Delusion Problem

If an entrepreneur goes to raise money in the Valley and is unsuccessful they are forced to concede one of the following points: either (a) I am not a good fundraiser or storyteller, (b) This should not be a venture backed business*, (c) I have not proven sufficient traction, or (d) This is not a good idea period. [There may be other nuances or derivatives of these four, but you get the idea.]

This is because the Valley funds over a thousand new companies annually, plays host to hundreds of seed stage funds, and has the deepest network of angel investors anywhere in the country. Lots of companies get funded and you didn’t.

But in Chicago, an entrepreneur can ignore all of those failings and instead simply blame Chicago: It is Chicago with its low risk tolerance, or its culture of demanding revenue, or its disposition towards boring enterprise businesses, or excuse Z that are the reason my company didn’t get funded.

Unfortunately, some businesses with outsized potential certainly do fall through the cracks in smaller markets (Fred alludes to this as well). But that simply serves to reinforce the potential for self delusion: wherein founders, should they so choose, never need to admit that their startups do not meet the threshold for investment. This can enable a cycle where local founders become resentful and/or spend years fundraising for a business that will simply not get funded.*

The Cap Table Problem

A big pitfall of secondary markets is poor cap table planning and management from the earliest stages that materially affects long-term growth potential. It typically falls into one of two buckets:

(1) We have met multiple companies that were otherwise intriguing except for the fact that a single investor (often an angel) owned more than 50% of the company. This matters because with an option pool, and 25% dilution of the impending financing, it leaves even a solo founder (let alone a 3-person founding team) improperly aligned for future growth needs.

(2) A company that initially raised money from angels at too high of a valuation, that later took on a bridge or even a fresh round of capital from that same group of angels (again, at a higher valuation). SO, by the time the company had proven product/market fit, it’s prior valuation was dislocated from the market values traditionally ascribed by venture institutions.

#2 is a far more egregious problem, often generating a vicious cycle of dependency on amateur investors. Now, to be fair, every market suffers from questionable practices of non-professional investors. But those practices are exaggerated in secondary markets that lack pre-seed infrastructure or successful entrepreneurs to properly seed the next era of startups.

In almost all markets, even ones without much institutional venture, there are copious numbers of high net worth individuals, successful real estate operators, or financial services pros who are looking to enter startup investing – either because they can’t generate alpha in their core jobs or because startups are sexy.

The problem is this: once the vicious cycle of dependency has been initiated (and because no one has an interest in marking down their investments) it is extremely difficult to disassociate from it. Which isn’t to say that great companies won’t be built with such a founding structure. Many have. But it does make it difficult to attract experienced local entrepreneurs or traditional institutions to the cap table.


Secondary and tertiary markets provide a lot of benefits for startups looking to build great businesses. Lower costs of living enable a lesser burn rate. Less competition for great talent and easier accessibility to successful advisor networks are also a big positive. That I am very bullish on Chicago should be obvious: despite being an East Coaster (DC & NYC) – and with opportunities in numerous cities – I’ve made it my new home.

But pitfalls and challenges abound. The better informed entrepreneurs are, the better non-SF markets are likely to perform.

* My intention is not to be crass or insensitive. There are many great businesses, digital and offline, that are simply not a fit for institutional venture funding. My first startup, CardRunners Gaming, is one such company – profitable from day one and profitable now, even a decade later, although it’s total market potential was at most $10M. Had the company raised institutional money, it would have imploded upon itself trying to stimulate growth in a market that simply could not accommodate it.

Thankfully, other investors such as Bryce Roberts at Indie.vc are building innovative funding models, intended to accommodate non-venture digital businesses. Here’s a great article on their efforts: Venture Capital and Its Discontents

Dear Brad, Fred & Mark: How The Hell Do You Do It?

A few weeks ago, I tweeted out the following:

Existential vc questions: Am I an investor, therapist, consultant or content marketer?

— Ezra Galston (@EzraMoGee) June 4, 2015

Let’s be clear: I am blessed. Being a venture capitalist is an extraordinary job. Within a single title & firm, I have the platform to be a thinker, be a writer, be a gambler, be a cheerleader, be a marketer, and be a friend. With some exceptions, I get to do what am I most passionate about.

And yet, VC is nevertheless, a really stressful job:

VC is easier than being a founder but still very stressful. Wish there was a forum for young VCs to share ideas and advice. There’s a void.

— Steve Schlafman (@schlaf) June 4, 2015

I’ve been vocal about my positive experience with the Kauffman Fellows, a 2-year fellowship that I recently (and sadly) graduated. And I’ve been equally vocal that the value in the program was not solely with the education materials, but really came out in our quarterly group therapy sessions, aka “Debriefs.” In an industry which can be rather opaque (even for us on the dark side) I realized how paramount it was to have an unconditional, non-judgemental group of VC friends who understood all my personal fears, struggles, and weaknesses in the industry.

And so, given my commitment to transparency, I will share one of those personal struggles. I look at heavyweights like Brad Feld, Fred Wilson, and Mark Suster & just have to ask: how the hell do you do it?

How are you everywhere at once? How do you produce so much content? How do you maintain thoughtfulness on the forefront of industries? How do you have time for all your entrepreneurs? How do you have the time to help them hire? How do you have time to handle their midnight freakouts? How do you have time for your freaking families?!?! How do you stay balanced? How do you find time yourself? Seriously, how do you do it?

And Brad – and this one’s for you – I have sent you I think two cold e-mails in my life (and we’re not friends although I’d love to be!!!) and your average response time is….wait for it….1 minute.

As a young VC, I look up at the edler statesmen of the industry and am simply in awe. It’s not about working hard. Because everyone works hard. And it’s not about being smarter, because everyone in this industry is hellasmart. So it must be something different? And I’m not sure I can pinpoint it.

Here’s where I’m coming from: For example, I love producing content – I absolutely love writing. But you know what? All the people who come up to me or send me notes complimenting those successes actually add to the anxiety: will my next piece also be published on TechCrunch or Forbes? Will the next piece also get 100k views? Will I wake up to e-mails from public company CEOs who stayed up late to offer feedback on my thoughts?  (But please keep the compliments coming!!! just for my mom to read, yknow?! ok, thx!)

I’ve read the practical tips, but frankly, I find those underwhelming. Not checking Facebook is not a solution to this problem, because while time management is certainly a part, it’s only one of the axioms. This is a question that is more conceptual, emotional, maybe even spiritual than it is practical.

Sometimes I wonder if it has to with playfulness (a concept I articulated in The Importance of Being Dumb). I think that’s part of it. And I also wonder if it’s about not being too hard on yourself (I’ve noticed that all three of you are open about your weaknesses and struggles) – and that’s a part of self-awareness anyways, which is undeniably a vital quality for VC.

I think a lot also has to do with triaging focus. It’s another concept Greg McKeown discusses in Essentialism (I promise I’m not getting paid to shill this book):

Essentialism is not about how to get more things done; it’s about how to get the right things done. It doesn’t mean just doing less for the sake of less either. It is about making the wisest possible investment of your time and energy in order to operate at our highest point of contribution by doing only what is essential.

The way of the Essentialist means living by design, not by default. Instead of making choices reactively, the Essentialist deliberately distinguishes the vital few from the trivial many, eliminates the nonessentials, and then removes obstacles so the essential things have clear, smooth passage. In other words, Essentialism is a disciplined, systematic approach for determining where our highest point of contribution lies, then making execution of those things almost effortless.

And yet, as much as I want to envelop myself in Greg’s beautiful prose and allow only the vital activities to permeate my existence, it still seems so practically impossible. How do I avoid all the meetings I have to take as “favors?” Or the meetings I take “defensively” – because if I don’t, and the company gets huge, then I get blamed. Can I stop attending certain events which waste untold hours if the effect will be to hurt the feelings of the organizer? Should I stop spending my evenings with my baby boy and instead be that VC who responds to nightime e-mails instantaneously? Should I stop cooking dinner for my pregnant wife? And on and on and on.

And, as I believe personal and professional lives are inextricably connected, feeling really freaking good about time utilization in the professional sphere (or personal) will undoubtedly make one more focused in the other realm.

Yesterday, my wife and I took our 2.5 year old son for a walk on the beach, gently testing the lapping waves of Lake Michigan with a timid toddler. It was a beautiful day and perfect weather. We both looked relaxed, dressed in our aqua blue polo and skirt, respectively. And yet, when she asked me “honey, are you really here right now?” I had to admit that I was struggling. My mind was in so many places – how to best strategize portco issues for the coming week, how to react to certain family issues, how to sell myself to a series of founders I love – I was also at the beach, but it was only one small piece of the puzzle.

That moment made me want to write this blog. So, to those who are making it: how are you everywhere at once and yet always focused in the present – for your families, your partners, and your entrepreneurs? Because I am struggling. And I want really badly to figure it out.

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