There Is Life Beyond the Bay

 

[new post] Investing Outside The Bay Area: https://t.co/g5mj4nUbtU

I’ve wanted to write this for a long time. You’ll find many links, data & research, and geography stats for Haystack co’s. To some, this post will be new information; to many of you, it may seem obvious already. https://t.co/YJ1tH7DDJr

— Semil (@semil) July 21, 2018

This whole post by Semil was fascinating.  I spent a month in SF and Silicon Valley in February of this year.  Met with some people, and learned a lot.  An interesting thing that I learned working with my partner Kenny at West Loop Ventures had to do with the psychology of engineers.

Virtually every seed fund I spoke with didn’t invest outside the Bay.  If they couldn’t get to a board meeting in 30 minutes, they didn’t do the deal.  When I co-founded Hyde Park Angels we zeroed in on a “day’s drive”.  That meant if a company was within 6-8 hours drive time, we’d look at funding it.  It’s a total difference in perception.

Here is an anecdotal story.

At HFT firms all over Chicago, they’d see a lot of people that built different apps for them.  Usually they were trade signal apps that would tell them when something was happening in a market.  If the engineer who built the app was from the outside, the internal engineers would rip the app apart and criticize it.  They’d say they could build something better.

I think that sort of psychology extends to entrepreneurial ecosystems as well.

Our fund has closed two deals in Chicago and one in NYC.  Stay tuned for a couple of more.  We have backed two female founders and two Hispanic co-founders. I really like the way we go about building our portfolio and I really like each and every founder we are working with.

WLV invests in business to business financial technology companies.  We invest $250k-$500k at seed.  We lead. We like to serve on the board.  We like to go early, and invest at valuations that are significantly lower than you’d see for the same deal in the Bay. Companies we invest in are platform type companies solving really big problems for Big Finance.  Founders are typically more experienced.  It turns out that the structural and vital networks needed for the companies we invest in are located in places like Chicago and New York.  The talent needed to build these companies resides outside of the Bay too.  When companies like ours go to the Valley a lot of participants don’t really understand what they are doing and don’t know how to size the market or see the opportunity.

The Bay Area often gives off the perception that if it wasn’t built there, it must not be good.  That extends up into many of the fund of funds that allocate capital to venture funds.  There are a lot of reasons to invest outside of the Bay Area.  When I comment that funds ought to do this, I am not criticizing the Bay Area at all.  It’s the best network and probably for the rest of my life be the #1 place venture dollars are invested.

However, because of the breadth, pace, and depth of technological changes flowing through every single business vertical and every country on our planet, there are more places to invest and more opportunities to find value outside of the Bay Area.

I remember seeing a video of Social+Capital founder Chamath Palihapitiya talking about startups.  He said he didn’t want to fund the commercial real estate community with his dollars yet that’s what was happening because the cost for space in the Bay Area was so high.

Data shows Chicago is the best place to invest for return by far.  However, the stats are skewed because there aren’t as many startups in Chicago as there are in a place like Silicon Valley.  It doesn’t seem to be part of the major conversation yet as people are focusing on LA, Seattle, and New York.  However, none of those places have a low cost of living either.

Semil sees movement from the Bay Area to other locales.  He writes, “nearly 50% of Bay Area-based technology job seekers searched outside the Bay Area, and this climbed to nearly 60% for the age 55-64 bracket”.  It’s not just the cost for space. It’s the entire cost of living.  Housing is way more expensive in the Bay than it is in a place like Chicago.  I was going to meet a friend when I was there.  They lived in Walnut Grove and we were going to meet in San Jose.  It would have been more efficient for them to fly to another city than work public transportation or drive to San Jose and back.

When we speak with engineering students and business school students at places like Illinois, Michigan, Purdue, Wisconsin, Indiana, Northwestern and Chicago, they talk about a desire to stay in the Midwest.  In some cases if they are working on a company that clearly has a better chance of survival in the Bay Area than the Midwest, I encourage them to go.  In other cases, I try to find ways to help them to stay.

There are massive advantages for companies NOT to be in the Bay Area.  Loyalty of tech talent, costs, and access to potential customers are just a few of them.

There have been many times I have left Chicago in the morning and driven or flown to another major city to do something and been in my bed that night.  Day trips are easier here than in other locales.

Personal taxes are another matter.  California has a tremendously high personal income tax.  So does NYC.  Seattle or Austin are by far the lowest tax place for ecosystems outside of the Bay.  Chicago has low taxes, but very high property and sales taxes.  Once you decide to pull up stakes and move, all economic factors are going to come into play.

There is also diversity of thought.  People aren’t all the same politically or generic in their beliefs outside of the Bay Area.  There isn’t lockstep, so the environment is sometimes not as stifling personally.  On the other hand, the Bay will support ludicrous big ideas which other ecosystems have trouble grasping.

One of the pulls that advantages the Bay is survival.  Semil writes,  “For instance, I’ve noticed within Haystack’s companies outside the Bay Area, it’s possible to build up a core team and recruit people out to their headquarters, but then preparing the companies for follow-on Series A financing in the Bay Area is a grueling exercise. New technologies make it easier to communicate quickly across state borders, but how do you make for serendipitous interactions or peer pressure from being around other startups?”

I don’t disagree.  Series A money is harder to raise outside the Bay than in it.  Series B money is available outside the Bay.

Entrepreneurial ecosystems outside of the Bay do need to develop that Series A bench.  In Chicago, we have deep pockets locally when it comes to Series B. For exits, we have a huge cadre of PE Firms and Fortune 1000 companies that will look at a company.  I will tell you that fundraising is significantly harder if you are outside the Bay than in it.  The network of traditional capital suppliers have their own biases and heuristics, and they are starting to question them but they are slow to change.  People like me have to work harder to build those relationships, and because we aren’t from the system often times we don’t know how.

It’s good to see the entrepreneurial world evolve.  By definition, entrepreneurship should not be about one place.  It shouldn’t be about one type of person.  Entrepreneurship is open to everyone.  It just starts with the word “try”.  Entrepreneurs are doers, and doers live in every part of the world.  The money part hasn’t flowed to them yet.  But, it will.