Editor’s note: Jack Studer is a partner at Lamp Post Group.
Considering how important proprietary deal flow has become as a tool for differentiation within venture capital, it’s surprising that more VCs aren’t shopping in the South. They simply aren’t looking at the concepts and companies coming out of Nashville, Atlanta, Birmingham, Chattanooga, and other Southern startup hubs. At best, VCs might have a token startup on their roster from outside the Valley, mainly for bragging rights about geographic diversity and risks taken. It hardly counts as truly investing in the region, much less diversifying a portfolio.
I recently got back from Y Combinator’s summer Demo Day, where I caught up with old friends, fellow venture capitalists, PE fund managers, and those from a more traditional corp dev background. One thing they all had in common was that they are flat out ignoring Southeastern deal flow. At the same time, they all want to see a fresh idea that doesn’t feel as over-shopped as many of the deals currently cooking in Silicon Valley.
The first would resolve the second. The startup world outside Silicon Valley is still largely an untapped frontier. There’s a huge potential for a reverse gold rush if West Coast VCs would seek to mine Southeastern startups that are rapidly growing in a rich, pro business, distraction free entrepreneurial environment. A variety of industries are flocking to the South, from healthcare to tech to manufacturing, creating a variety of fresh opportunities to innovate and disrupt.
That’s not to mention how capital-efficient (aka cheap) this place is. The salaries are lower, the overhead costs less, the real estate costs less, the cost of living is less. Two million dollars invested into a startup outside the Silicon Valley echo chamber can move it well beyond a MVP and a handful of beta customers.
As we’re seeing firsthand with startups like Ambition, Bellhops and Skuid, an investment of a few million dollars in a Southeastern startup can allow a company to scale rapidly and deepen its relationship with an expanding customer base. Even better, it might pay off with an exit like QuickCue enjoyed when it was picked up by Opentable for $11.5 million in cash in 2013. And yes, an $11.5 million exit can be a 5x return in 18 months when your entry point is appropriate.
The Southeast has a handful of its own VC firms, of course. Nashville and Atlanta each have a few good funds. Even Chattanooga, (Tennessee’s fourth largest city) has seen a number of new funds appear in the past three years, including Chattanooga Renaissance Fund, The JumpFund (a female-focused Angel fund), Spartan Ventures, Blank Slate and Lamp Post Group.
Still, there is plenty of room at the table for larger venture firms to leverage their own expertise and extract massive value from the Southeast. Especially at the rate the Southeastern economy is growing – thanks to the expansion of more traditional industries, such as healthcare and manufacturing, as well as innovative new municipal internet solutions like EPB’s fiber network in Chattanooga – for investment in the Southeast to generate outsized returns for smart investors.
The regional early stage VCs have invested in many promising young homegrown startups. Yet Silicon Valley continues to look inward rather than outward while simultaneously offering huge prizes to anyone who can offer them something they haven’t seen before. When Ambition went to Y Combinator last winter they were one of the new kids on the block. They were fresh, and it worked to their advantage when they were repeatedly included on lists of the most promising startups in the class.
There is a line of more fresh young startups right behind them, too. Every day I get new pitches in my email box and requests for meetings from eager young entrepreneurs who don’t want to go west, but want to bring their vision to life in their hometowns. None of this should come as a surprise to anyone. Southerners are rather hard headed about things and we’ve taken a liking to this startup thing.
The surprise is going to come when your junior associate sources a 40x deal from a ZIP code you didn’t know had electricity (much less the fastest Internet in the world). Don’t be worried when that same associate ends up your boss. Twenty year olds already run the world. Millennials are famous for the “think outside the box” mentality that has pushed startups and tech into innovative new directions. So why aren’t VCs thinking outside the box of Silicon Valley?
As much as startups and the future of the web are compared to the Wild West, few VCs are willing to join them on the new frontier– the mid-sized cities in the South, Midwest, and even back east in New York City where many startups are flocking, and thriving. Where VCs invest comes down to a lot more than just proprietary deal flow. It ultimately comes down to the ever-present question of innovation.
How far are VCs willing to go (literally) for the next big idea? And what is preventing them from going that distance? Right now it looks like the fringes of Santa Clara are their limit, though Mark Cuban’s recent comments at TechCrunch Disrupt suggest that things may be about to change. To find what they’re looking for, VCs will have to follow the advice given to so many founders in the industry: they’ll have to take a risk, push past their comfort zones, and explore the unfamiliar. If they do, the reverse goldrush could change the startup industry.