The (Potential) Start to a New Research Thread
TL;DR: I love interacting with entrepreneurs across the country, but especially those outside the echo chamber that is Silicon Valley. I have started working with a graduate student (who I hope is the first of many) to look at data around these different entrepreneurial ecosystems. More details below …
Why Now?
Over the last few months, both Semil Shah and Hunter Walk have written eloquently about their firms increasing investment activity outside of Silicon Valley. Both do a nice job summarizing what a lot of different Venture Capitalists are expressing to me (and many others I’m sure) privately — there’s strong interest in investing in high growth startups outside Silicon Valley.
So, about two years ago, as a Bay Area resident, living right off Sand Hill Road, started intentionally investing outside the Bay Area. I wouldn’t say I’m entirely comfortable with it just yet — it is hard — but I’m getting more comfortable with each passing month.
>> Semil Shah
What I want to emphasize though, is we don’t think about this as “value shopping” (trying to get cheaper valuations elsewhere) or “competitive pressure” (we believe our product is preferred by a subset of great entrepreneurs and there’s more than enough opportunities to deploy our funds solely in the Bay Area if we chose to do so). No, instead we are simply looking for minimally the right team to solve a big problem and even more opportunistically, companies that might actually be advantaged by a non-NorCal homebase.
>> Hunter Walk
As someone who:
- started and sold three startup companies while living in Pittsburgh, PA
- teaches at Carnegie Mellon University in Pittsburgh and
- has been geographically agnostic since the day I started investing in startups full-time ^1
let me first say how supportive I am of more money flowing to startups^2 outside the Bay Area. This is a great trend, but also frankly an unsurprising one because of two indisputable facts:
- The amount of capital flowing into VC as an asset class is growing “full steam ahead” as investors search for yield. This has resulted in more seed funds and larger growth funds.
- There also are amazing entrepreneurs everywhere and therefore great companies being built everywhere.
High growth entrepreneurship is not constrained to a few cities, so it just makes sense that capital will flow increasingly efficiently to these entrepreneurs living outside the Bay Area.
Isn’t entrepreneurship outside the Bay Area already well documented?
When I read reports on the “entrepreneurial ecosystems” in these other markets, I can’t help but feel the analyses lack rigor and are oversimplifications. Understanding nationwide trends and variation in entrepreneurship is a complicated undertaking which doesn’t fit into the listicles and convenient narratives editors and authors prefer.
As the most recent example, Steve Case’s venture firm two months ago released a list of “The Top 10 Rising Cities for Startups.” I’m not trying to pick on this specific list; my bigger point is that reducing them to a single ranking list at all feels like a flawed approach, especially using such limited data. Their specific data points were: 1) major VC deals, 2) 3-year deal count and 3) cost of doing business, but that’s clearly not the same as best cities for startups.
Instead of trying to reduce all of entrepreneurship to one list, I think you need to start by acknowledging two things: (1) each city has its own strengths and weaknesses for different types of startups and different types of entrepreneurs, and (2) each city can achieve its maximum potential not by trying to become the next Silicon Valley, but by playing to its strengths and becoming the best version of itself. Once you acknowledge those things, a “Top 10” list based on financial criteria becomes fairly meaningless to an entrepreneur — a securities trading technology startup might best be placed in New York near its customers, while a robotics startup may find New York expensive and unhelpful.
To better understand nationwide entrepreneurship, I think one should start by trying to create multiple datasets that collect details down to the level of individual companies and founders. Those data can be aggregated and then augmented with other helpful datasets like venture investment, first customers and support from other institutions before summarizing to conclusions.
Every city and region has its own set of unique factors, resources, and challenges. I believe they each can thrive by building the right type of entrepreneurial ecosystem for their community. Therefore, the goal is not a list of “X cities ranked 1 to X” but instead different cities that end up being the best version of that city that they can become. As I have been saying since I was a research fellow almost 20 years ago with Richard Florida, the mission isn’t to create 20 Silicon Valleys, but to create 20 unique, diverse, vibrant entrepreneurial communities each rooted in its own history and culture. And I try to practice what I preach; my advice to city leaders in Pittsburgh regularly is not to try and replicate Silicon Valley but rather to become the best Pittsburgh we can be.
So What?
As I have been thinking about this, I decided to see how difficult it’d be to put together other datasets that could derive more nuanced recommendations. More specifically, I asked a really impressive graduate student in one of my classes (Christian Bergland) last spring if he’d be interested in doing an independent study to look at this. Christian jumped in head first and started pulling data together.^3
Well first to answer the question — how difficult is it to pull this type of dataset together? It turns out this is quite difficult. I have a new appreciation for why publishing a simple top 10 list is so appealing.
However, as you look at different datasets starting with companies and founders building up from those atomic units the results get really interesting. Christian did end up doing some pretty interesting analysis into one lens of this conversation — looking at each region’s exits over $500M. To be clear, this is simply one question in a large set of questions that need to be answered. As Christian and I talked through what he was finding, it was very interesting (albeit more descriptive than prescriptive) so I encouraged him to share it publicly.
Over the next few posts, he is going to share those results in this publication. Regardless of what happens after this, I think the data he’s pulled and summarized are at least interesting inputs into this “startups outside Silicon Valley” conversation. There clearly is a lot more work that could be done.
What’s next?
That leads me back to the title of this post. I didn’t say this is DEFINITELY the start to a new small research project. I said this is potentially the start.
I’ve gone ahead and pulled this into a Medium publication because I could imagine that over the next year or so, other students like Christian will continue to dive deeper into different datasets and through conversations we’ll end up with some interesting conclusions. If that happens, I’d like to do so transparently, and publishing our progress on Medium will ensure we can share and get feedback as we move forward.
If this topic is interesting to you, I’d encourage you to follow this publication. And finally, if you are a graduate student at Carnegie Mellon who wants to look into this more with me, my office is on the fifth floor of the new Tepper Quad building :)
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1: currently I’m the lead partner for Birchmere on active investments in 8 different cities which I visit at least once per quarter
2: it’s should be pointed out these venture dollars flow to startups, not regions
3: Those who know me, know this is increasingly my go-to move. That’s how I started down the path that ultimately led to my book The Science of Growth and later with a different group of students the research that led to my lab The Corporate Startup Lab. It doesn’t always work, but when it works it works really well.
