It’s a question that every entrepreneur asks themselves at one point. Especially when they are raising capital. It seems every day in online publications that journal the happenings in the startup world, someone is raising gobs and gobs of capital with the snap of a finger.
Raising capital is never that easy.
However, former Hyde Park Angels associate Ryan Gembala recently made a video with the intent of talking to legislators in Georgia about the differences between Silicon Valley and the entrepreneurial climate in Atlanta.
I agree with some of Ryan’s points. Disagree with others.
Ryan makes some good points about capital, particularly velocity of capital. I think what he means by that is two fold. One, speed of deciding to invest. Two, the risk tolerance of investors.
Legislators have very little control over the velocity of capital. The only avenue open to them is tax policy. Legislators need to look at all the avenues entrepreneurial capital flows make their way down, and eliminate all taxes, regulations and fees associated with them if they want to eliminate barriers to velocity.
Then they have to do what legislators hate to do when they want something to happen, wait.
Another question they can ask themselves is this, “Why is the speed and velocity so much different in Silicon Valley than my area of the country?”
This isn’t a simple answer. But I have a few ideas. The Silicon Valley network is old. It’s been around since the 1930’s. You don’t replicate that in a day. The investors in the Valley get a lot of at bats. They see a lot of deal flow. More at bats gives them more opportunity to hit home runs and make money. For every Facebook or Google, there are 1000 companies they invested in that failed. You don’t hear about the failures-but what the Valley does with failure is very interesting and can be replicated elsewhere immediately.
They don’t treat failure as a scarlet letter. As long as the person learns from it and can talk about what they learned, they get a second, third, fourth and fifth act.
Other areas of the country aren’t as forgiving.
Additionally, as an investor, you have to allow yourself to fail. Just like the entrepreneur, you have to learn from failure. As a trader, I constantly learned from bad trades I made. Not every trade I made was a winner. Same with investing. If you look at my portfolio, I have some really damn good companies that are raising second and third rounds of capital. I have some failures too.
Unfortunately, there are those with a narrow mindset out there that criticize my track record. They say it isn’t well developed.
If we continually wait for everything to be well developed, we miss the growth phase of the project. It’s the growth phase that is most volatile-but also offers the highest rate of return because of that volatility. Silicon Valley understands and internalizes that. They insulate themselves from volatility by making a lot of bets, having a lot of companies, and continually feeding the cycle so that the laws of average work for them-rather than against them.
Reminds me of a WC Fields quote from the movie, The Bank Dick.
Egbert Sousé: My uncle, a balloon ascensionist, Effingham Hoofnagle, took a chance. He was three miles and a half up in the air. He jumped out of the basket of the balloon and took a chance of alighting on a load of hay.
Og Oggilby: Golly! Did he make it?
Egbert Sousé: Uh… no. He didn’t. Had he been a younger man, he probably would have made it. That’s the point. Don’t wait too long in life
Silicon Valley investors don’t sit on their hands. They actively network and try and put deals together. They are less worried about certain metrics the rest of the world cares about. But, they make a lot of mistakes and miss a lot too. There are great companies being built in other areas of the country the Valley looks down its nose at.
Silicon Valley is expensive, and because there are so many startups it might be tough to stand out. You could get lost in the shuffle. Second round capital isn’t any easier to come by there any more than it is anyplace else. Quality of life for your team and family is a consideration.
So the question remains, if you are an entrepreneur, should you head to the Valley or should you stay put and try to build your business where you live today? Or, should you head to a less developed entrepreneurial ecosystem and try to build your business there?
The answer is it depends.
Think hard about what resources your business is going to need besides capital. Are there indigenous resources in your area that you can utilize to create customers for your business. Revenue cures a lot of ills. For example, Ryan talks about his hometown of Atlanta. What’s strong in Atlanta? What industries come to mind? If you are building a business that interfaces, leverages the assets of, or can use those industries as ready customers, you might want to stay in Atlanta.
In Chicago, we have a diverse set of businesses to leverage, plus the mass of population to create density and get things done. For example, if I was going to do any kind of an exchange, I wouldn’t start it in Silicon Valley. I’d base it in Chicago where there is excellent DNA that knows about exchanges.
There are many facets to creating a great place for entrepreneurs. One is having ready risk capital. But support networks for growth and failure need to be there. Mentorship is huge, and one way experienced executives can give back to the community. Making it easy to be a customer is another way existing businesses and governments can pave the way for more startup activity.
In other parts of the country, we are learning the lessons of putting capital to work. Chicago, and the midwest in general has been a private equity kind of place, not a startup kind of place and the mindset is different. Politicians everywhere need to be very mindful of the kinds of risks people take to invest that capital, and need to think hard about breaking down barriers for it if they want innovation, and startup ecosystems to bloom.
Entrepreneurship isn’t rocket science. But, it is a continuing experiment that can be consistently measured. It also takes people willing to take risks with ideas and money. They have to be courageous, and have the will to fail. Just like a Phoenix rising from ashes, out of those failures will be some wonderful long lasting companies.