An Interesting Thought About Funding in Silicon Valley Versus Chicago

We were just at the Presidio RAISE conference in Silicon Valley.  It was pretty good.  We learned a lot and met a lot of people.  There were breakout sessions that were informative.  I started thinking about Silicon Valley and Chicago.

There is no doubt that Silicon Valley is the best startup ecosystem in the world.  I am not debating that and it’s stupid to debate it. There is no doubt you can build successful startup ecosystems in other places because they run on two resources which are present everywhere; people and money.  I know they say that you need great entrepreneurs t0 build an ecosystem, and it’s true. Great ones are entrepreneur lead.

But, you also need money with an appetite for risk.

Chicago has some money investing in the startup community, but not enough.  Chicago has a tremendous talent pool, especially in certain industries.  It was really interesting interacting with entrepreneurs and with emerging fund managers and listening intently to them.  It’s just easier to raise money in the Valley for everyone in the industry.  There are so many competitors and fear of missing out that it makes money flow easier.

A thought occurred to me in the family office portion of RAISE.  If you are a family office interested in allocating to venture capital and want to play in Silicon Valley, there are only a precious few ways to do it.  There is so much competition, it’s impossible to be passive.  That means hiring an entire dedicated VC staff and go out and compete for deal flow.  Number two is direct invest into funds.  But, just getting into top funds is highly competitive.  Many of the top VCs won’t even meet with a family office.  The fund of funds sell themselves and differentiate themselves because they have access to the top funds.  The last way for a family office to participate is interview managers and direct invest in funds.  But, bear in mind that family offices don’t really want to be “out there”.

The good news is all the data shows that emerging managers with smaller funds do better than everyone else.

Putting the data together makes an interesting conclusion.  If you were a family office, instead of going with the herd it might be more advantageous for you to invest in an emerging manager with a smaller fund size in a place outside of Silicon Valley.  If I were a Silicon Valley family office and knew that other markets were underserved, I might allocate some capital outside of the valley to beat other people to the punch before funds got too big and I couldn’t get access.

  • While this seems like a good idea, it doesn’t mention the “winner-take-all” network effects.
    I recall that Facebook moved out to expensive Palo Alto (Silicon Alley) to be more successful.

    The huge competition of VCs is to invest in a future “winner” as in “winner-take-all”.

    It seems likely that over 90% of the big (SW) tech hits of the last 10 years and next 10 years will be in or from Silicon Alley, because that’s where the money looking for winners is most available.
    You can’t win it anywhere, if you can’t win it there.
    So investing elsewhere is unlikely to get such winners.

    As “maker tech” expands, there will be more winners which are not really winner take all home run investments, but will be fine ROI.

    • A lot of it is winner take all. Not as true in finance.