Should early stage startups raise money from Silicon Valley?
Founders of early stage companies are often enticed by the Silicon Dream, the startup equivalent of what Hollywood means to actors. However, founders should carefully consider moving to Silicon Valley based on whether it benefits the company. And a company can benefit from the move if it serves the three Cs — customers, capital, and competencies.
This is the second in a series of three posts that discuss the three Cs and focuses on the role of Silicon Valley capital for early stage companies. The first post looks at the importance of early stage companies working close to their customers. The third one explores when should companies rely on Silicon Valley as a source of talent. The posts have been inspired by the European Entrepreneurship course at Stanford and I write them as a founder of BudgetMatador, a web app for collaborative financial management.
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Early stage start-ups often look towards Silicon Valley (SV) for funding. That’s mainly because funding from SV simply sounds like the Holy Grail in startupland, but also because early-stage rounds in the Valley can give teams more runway for the same equity than injections in most other startup ecosystems.
However, founders from outside the Valley quickly hit brick walls when they prep their fundraising missions. Angels and VCs couldn’t really be bothered with foreign teams. Why is that? In the context of globalization and remote work, couldn’t we all just get funded from anywhere and then work from anywhere?
Contrary to popular belief, location is more relevant then one would expect from the perspective of both entrepreneurs as well as investors. Angel and seed investors have ample reason to pick local teams over foreign ones. The risk of negligence or downright fraud that comes with teams operating at a distance is self-explanatory. More importantly, however, location matters in terms of proximity to capital, and the SV capital markets are second to none when it comes to the quantity and quality of investments. Let’s take a closer look at why.
1) Different strokes for different folks. Firstly, and most obviously, venture capital (VC) is what makes the SV start-up ecosystem stand out globally. The quantity of capital is unprecedented, but it’s the quality of capital that makes the difference. This quality stems from the diverse range of investors in the Valley, who are highly specialized in terms of volume, stage, risk-appetite, connections, and “smartness”. Broadly speaking, it boils down to smart money and connected money.
The Valley is home to some of the smartest capital in the World, with investments from vertical-specific accelerators and startup studios to angels and institutional investors with deep knowledge of pretty much any industry. First-time founders can benefit from such specialization in profound ways — it’s like adding an experienced co-founder to your ranks.
Similarly, the better part of venture capital comes with invaluable contacts. Namely, investors want to add value beyond injecting money into the company. They can help with advice on strategy, product, sales, recruiting, legal affairs, additional funding (see Chris Sacca’s argument at the 27’ minute mark). Valley investors usually have their professional networks in the Valley, which is why they can best help their portfolio companies grow if the teams are actually based there.
Again, the value of easy access to business networks is the highest for first-time founders. In fact, the success of a16z portfolio companies is partly predicated on the strategy of equipping their portfolio founders with the types of networks that are usually limited to CEOs with decades of experience in their verticals (tune in to the 30’ minute mark). However, to profit from the contacts, either the entire team or at least some of its top dogs need to operate in the Bay Area.
2) Exits and capital markets. Secondly, the tech scene in the US has one of the most liquid M&A and IPO markets in the World. This is what makes the Valley venture capital machine tick, whereas European exit equivalents are dwarfed not only in size, but also mindset. Acquisitions are just not in the DNA of the often family-owned companies in Europe. Corporations in America, on the other hand, have it in their DNA to grow through M&A deals. Moreover, tech IPOs have become routine in the Valley, meaning that if startups do strike gold, they have a fully functional support system in place to take their companies public.
Pursuing investments from SV can be a worthwhile effort for early stage companies in general and first-time founders in particular. Access to capital, know-how, networks and exit opportunities in the Valley can pave the way for incredible growth. However, teams who venture down that path need to know what they are doing. Unless you have really, really impressive traction, it’s important to have local presence and make sure that at least one of the business side founders is ready to stay in the Bay Area to follow things through.
