Welcome back to the transcribed edition of the popular podcast Equity. Kate Clark had the hosting reins this week and welcomed Revolution’s Clara Sieg to the studio.
They discussed the trend of investors backing companies from “second-tier” markets like Austin, Atlanta, Denver, Philadelphia, Seattle, etc. Just how do cities become tech hubs? It’s a special kind of recipe, Sieg says. A city must have a great university, or a few, nearby to provide a constant flow of talent. They need some big corporations around for the same reason. They need a healthy community of angel investors ready and willing to get things going.
Sieg: Fundamentally in these second and third tier markets, an idea on the back of a napkin doesn’t get funded, so you really have to bootstrap to a certain degree and prove out really economics before you can unlock capital. Typically the companies that we’re investing in at the Series A, Series B level are a little bit farther along than their brethren would be in the Bay Area or New York.
Valuation expectations are just lower so you own more of a company for a smaller check-in. Inherently, if it’s an exit, that is a better outcome for you and it’s just cheaper to scale companies in those markets. Employee retention is better, cost of living is lower, so the capital required to scale these companies and that’s coming in after you and diluting you is less.
Clark: So when Steve Case founded Revolution, was he coming at it from the perspective of like, “This is obviously good business?” Which it is, to invest in these companies, or was it coming from a perspective of like, “It’s not fair that companies in these areas just don’t have access to capital like we do here in the Bay Area?”
Sieg: Neither, really. I think our investing approach in the early days, and what we still focus on today is what is now commonly referred to as disruption, right? Historically, Zipcar was basically disrupting the rental car market, and it was not really thought of as a great venture-backable opportunity in the early days. That’s obviously changed now, transportation is a huge piece of what venture capitalists focus on, but from day one, we focused on sleepy, incumbent markets where technology can be an enabler of a new business model that makes it better, faster, cheaper for the consumer, or the business that it’s serving, and where you can change the margins in the business to create a market leader that incumbents then either have to own or that can be a large standalone company.
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Kate Clark: Hello and welcome back to Equity, the TechCrunch venture capital focused podcast. My co-host isn’t with me today, but I have a special guest, Revolution Ventures partner, Clara Sieg, in the studio with us. Welcome to the studio, Clara. I’m sorry that it is a mess, but I hope that you can get past that. We’re really excited to have you today.
Clara Sieg: Yeah, excited to be here and the studio actually looks great.
Clark: All right. Today we’re going to discuss investing outside of traditional VC hubs. Revolution, if you guys aren’t familiar, is a venture capital firm founded by the AOL founder, Steve Case. Sounds like it was about 15 years ago that you guys got going. Why don’t you tell us what Revolution focuses on?
Sieg: Yeah, sure. We started in 2005 when Steve left AOL. Really began as his family office, investing off of his balance sheet. Over the next five years, we invested about half a billion across a bunch of early stage investments that turned into later stage stuff. Then around 2010, we decided to institutionalize, largely because we got to a point from a family office perspective where we could do new early-stage investments, at the exclusion of following on in existing portfolio companies or do follow ons at the exclusion of new stuff.
So, raised a later-stage growth fund, that’s when I started working with the guys and then a venture fund — so it’s about a billion and a half under management across the platform. Really supporting companies from day one up through growth stage.
Clark: What sort of companies are you looking for?
Sieg: Part of our thesis is focusing on investing outside of hotbeds of venture capital. We certainly do invest everywhere opportunistically, but the core thesis is investing in second- and third-tier markets where you still have this pretty significant capital gap. When you zoom out, 85% of Fortune 500 companies are based outside of the Bay Area, New York and Boston, but about two-thirds of venture capital goes into those three areas.
We see that as a huge gap, felt particularly at the Series A, Series B level where Revolution Ventures focuses, largely because it’s hard at an early stage to cover the whole country from a sourcing perspective. And then typical venture capital firms have a very high cadence of investing and not as concentrated of an approach as we do, so it’s historically been hard to manage a portfolio across the U.S.
Clark: I want to talk more about what it means to be a second- or third-tier market, but I’m curious, so you’ve been at Revolution for you said nearly a decade. Has Revolution from the get-go had this focus and emphasis on investing in these under-represented geographies so to speak?
Sieg: Yeah. It happened at the very early days, a little bit by chance. A lot of the big outcomes that we had when we were originally institutionalizing and putting our track record together, we realized were from outside of the Bay Area. So Zipcar was an original investment at a company in Portland, we moved to D.C., Revolution Money, which is based in Tampa, Florida, Extent Health in Salt Lake City, and as we started to realize that, and be a little bit more conscious of it, we started thinking about why.
Sieg: Fundamentally in these second and third tier markets, an idea on the back of a napkin doesn’t get funded, so you really have to bootstrap to a certain degree and prove out really economics before you can unlock capital. Typically the companies that we’re investing in at the Series A, Series B level are a little bit farther along than their brethren would be in the Bay Area or New York.
Valuation expectations are just lower so you own more of a company for a smaller check-in. Inherently, if it’s an exit, that is a better outcome for you and it’s just cheaper to scale companies in those markets. Employee retention is better, cost of living is lower, so the capital required to scale these companies and that’s coming in after you and diluting you is less.
Clark: So when Steve Case founded Revolution, was he coming at it from the perspective of like, “This is obviously good business?” Which it is, to invest in these companies, or was it coming from a perspective of like, “It’s not fair that companies in these areas just don’t have access to capital like we do here in the Bay Area?”
Sieg: Neither, really. I think our investing approach in the early days, and what we still focus on today is what is now commonly referred to as disruption, right? Historically, Zipcar was basically disrupting the rental car market, and it was not really thought of as a great venture-backable opportunity in the early days. That’s obviously changed now, transportation is a huge piece of what venture capitalists focus on, but from day one, we focused on sleepy, incumbent markets where technology can be an enabler of a new business model that makes it better, faster, cheaper for the consumer, or the business that it’s serving, and where you can change the margins in the business to create a market leader that incumbents then either have to own or that can be a large standalone company.
And inherently when you think about the dynamics of investing in these old, sleepy, incumbent industries, a lot of core talent is focused regionally. So, the idea that tech for tech’s sake is everywhere, is probably not necessarily true. The hub is certainly San Francisco and Silicon Valley, but that’s not what we’re focused on.
Clark: Let’s talk more about you specifically. How did you get interested in investing and why don’t you tell us what you were doing before you ended up at Revolution nearly a decade ago?
Sieg: I grew up in Pittsburgh, Pennsylvania, which I highlight because it’s a market that’s really good for us. There are a lot of dynamics about the city that have changed tremendously since I grew up there even, because of the university system and technology advancement. I came out to the Bay Area to go to Stanford, got a degree in economics, largely because my dad was a math professor and he made me do math all the time.
Sieg: That was an easy part, but I thought it was complete … I mean, growing up it was all very theoretical and ECON was the first time it overlapped. I think investing is very similar in the sense that you’re applying numbers and real intellectual rigor and quantitative analysis, but at the early stage, there’s still a lot of applicability in your life and a real humanistic component to it, which I really enjoy.
Sieg: Right out of school I did investment banking at UBS and the leveraged finance and the Financial Sponsors Group. That was at the height of the meltdown in ’08. We quickly rebranded to UBS Restructuring. It wasn’t a great time to be in investment banking. A handful of us left to start our own firm, which ended up being a little bit of a disaster, and I started working for one of my old bosses from UBS, largely because I needed a job and didn’t want to move home to Pittsburgh. Although I do think it’s a great market for investing.
Sieg: In that capacity, still in an advisory role, started working for Steve. That was when we were first institutionalizing so I was the junior person, doing all the analysis, putting the track record together, and helping us to raise our first fund.
Clark: You spent your entire career either in investment banking or now in venture capital investing?
Sieg: Yeah.
Clark: Since college? Okay.
Sieg: Yep.
Clark: How did you end up meeting Steve? Were you interested, given your background growing up in Pittsburgh, were you interested in helping, supporting companies in these other markets? Or, was it just like a chance meeting?
Sieg: Not a chance meeting, in that it was my job at the time. But certainly as we crystallized the strategy and really put more and more efforts behind it, and had capital to deploy, it was something that really spoke to me from my life perspective, but also from the perspective of being differentiated in what is a really crowded asset class.
Clark: Things have changed a lot, even in the last couple of years, as far as attention being paid to just the fact that there is a funding gap across the U.S. I’m guessing 10 years ago, there wasn’t a lot of knowledge or information out there to even understand how much venture capital investment in these different cities differentiates. Can you talk a little bit about how it has changed, thanks to the rise of various data platforms and just people actually talking about it?
Sieg: I think one of the key parts is a real focus at the local level with non-profit groups, accelerator groups, angel networks, that see what’s happened in the valley and have interest in spurring that economic growth. It makes the risk of leaving your job and starting something lower when historically there was zero funding provided at that very early stage.
And that’s great, the challenge now is that regional funds can’t support significant capital for a long period of time, so you do need the bigger checks from coastal firms to come in and offer support in that regard. I think it’s gotten somewhat easier to identify, but at the end of the day, at the Series A, Series B level, a lot of it, well a component of it certainly is the market size, the opportunity, et cetera. So much of it is the person and the founder, that when you don’t have strong ties to those regions and can’t diligence the person and understand their network and capability for hiring, recruiting, et cetera, it’s more challenging and frankly, higher risk levels if you’re not integrated with that community.
Clark: Yeah. I think it’s similar to how in the last few years we’ve really come to realize that there’s a major gap in funding for female founders. But the amount of capital actually going to female founders is not seeming to actually increase year over year, much at all. Now that we’re very aware that these founders in these other markets are in great need of capital and often just ignored, because so many VCs don’t leave their home bases, which is most often San Francisco.
Sieg: I think it’s certainly changing, at least we’ve seen that in the perspective of our portfolio companies attracting later stage rounds. I think a positive for a lot of these communities is that San Francisco is such a crowded market and valuations are so through the roof, that people are realizing it’s really challenging to make money here if you’re not a tier one, tier one VC firm, because the only way you’re winning a deal is by paying through the nose for it. And then the degrees of freedom that you have, both from the perspective of strategics or next round of financing, when you price things that high, are far lower.
Clark: Right, it’s extremely competitive for VCs to get deals, and it’s also extremely competitive for companies to hire here. There are a lot of reasons why people are moving away. Let’s talk about this, you called it a tier one, tier two, or higher-tier, lower-tier market. What is a tier-one market?
Sieg: San Francisco. And New York.
Clark: Any other?
Sieg: So San Francisco, New York. I think LA is quickly becoming one, though there’s still a little bit of a capital gap there. Boston I would view in most areas as a tier one market.
Clark: Okay, and what’s a tier-two market?
Sieg: Austin, Seattle, Denver, Boulder area, Chicago, Washington D.C.
Clark: Is a tier three market just pretty much anywhere else where there’s …
Sieg: I would say tier two, tier three sometimes blend. I think there are core tenets of what we look for in markets that we view as emerging and really interesting. One, a university system that throws off talent every year. So, we can use Pittsburgh, my hometown, as an example. Carnegie Mellon and University of Pittsburgh are great sources of talent.
Sieg: Historically, what used to happen in Pittsburgh is that that talent would be trained and then leave. Now, with Google, Amazon, Facebook, Uber all having pretty big corporate locations there, the talent stays. And then the third part that we view as really important is the supportive angel and accelerator and seed stage environment, so that again, the risk of leaving your corporate job is not so big. And importantly, if your startup doesn’t work out, you can go back to that corporate job. Having a pool of talent that’s around that you can hire from is really important.
Clark: So just to reiterate, you need to have a really great university system, probably a few nearby, you need to have corporations based there, so that you have people obviously who are there in the first place, who are able to leave and then maybe go back. What’s the third ingredient that you need?
Sieg: The third ingredient is for the most part, having some sort of existing talent base with specific industry and expertise. In Pittsburgh, there’s a lot of robotics and AI.
Clark: Right, so you might see, because of that, founders spin off their own robotics startups?
Sieg: Yeah.
Clark: What are some of the I guess second tier, up and coming hubs, maybe aside from Pittsburgh, that you’re really interested in, that you see becoming a top tier market?
Sieg: Yeah, we spend a lot of time, Raleigh-Durham, we think is really interesting. Similar dynamics as Pittsburgh. Milwaukee/Madison area is actually really-
Clark: That’s not one I’ve heard anything about.
Sieg: … interesting. University of Madison’s there. You don’t realize how much consumer talent is actually there and big corporate… and it’s a really great cost of living there. The state offers really interesting tax incentives for investors, and for companies, so it’s a more business-friendly state to operate in.
Clark: Do you travel around to these cities a lot?
Sieg: Yeah.
Clark: When you’re doing that, are you meeting with accelerators? Are you meeting with angels? How do you go about sourcing deals?
Sieg: Part of the way we’re able to canvas the whole country, and obviously we miss stuff all the time, is we’ve spent the past decade really focused on building this leading brand, investing everywhere. Spending time in market, boots on the ground, Steve has dedicated a ton of his personal time and capital to getting on a bus and shining the spotlight on these different markets and meeting with key stakeholders. For us, that’s a great source of deal flow, and brand awareness in those markets.
It’s really just nurturing that. When you put dollars to work in emerging markets, the key stakeholders in those markets really remember you and so when the two or three opportunities every year that are high quality come up, we’re top of mind, and they know that we take the opportunities seriously, and we may not end up investing, but we’ll certainly spend time with the companies and give them a real shot.
Clark: So you actually, you mentioned a bus, but there really is a bus that … Is this part of the Rise of the Rest fund that does that bus?
Sieg: Yeah.
Clark: So why don’t you tell us a little bit about the Rise of the Rest fund, and this bus that travels around?
Sieg: Yeah, so the bus came before the Rise of the Rest fund. As we continued to work on building our brand and supporting these different ecosystems and really because it’s a passion of Steve’s, and he really believes that this is the way that America’s economic engine will continue to be a world leader, he started going, doing five cities at a time, getting on a bus, spending a day in the city, meeting with key players in the city, doing a pitch competition, spending time with different emerging startups, and really shining a media spotlight on it so that it becomes more attractive for people who are frustrated living in San Francisco, because they can’t afford a house, let alone a two-bedroom apartment, and see the opportunity elsewhere.
Clark: I mean, it’s certainly worked. Revolution is a brand that certainly anyone who pays attention to the intersection of finance and tech is aware of, and probably beyond that as well. Have you been on this bus yourself?
Sieg: I have, yeah.
Clark: What’s it like?
Sieg: It’s really fun. I think it’s a great way to see a city and really understand how that tech ecosystem works, and I would say it’s really positive for the city, too. But to get back to the question around the Rise of the Rest seed fund, after doing that a number of times, every city he went to, he through a pitch competition, he put in $100K, and then was following on, and also met a lot of interesting other opportunities at the seed stage through that, so decided to wrap a fund around it.
It’s a little bit different from the Revolution Ventures and Revolution Growth fund, which are both institutionally backed, very concentrated approaches, where on the venture side we’re really only doing 3-4 deals a year and reserving 1-2x per portfolio company, so really putting a lot of dollars in a lot of capital, a lot of concentration of our time and energy and network and company building. Whereas the Rise of the Rest fund is more focused on social community building in the sense that we’re putting checks to work very frequently, smaller dollars. They have over 100 portfolio companies.
Clark: You’re just trying to help these people get started. Have a little bit of capital, hit the ground running.
Sieg: Yeah, exactly.
Clark: Okay, so you’ve got the Rise of the Rest seed fund, which is investing in a lot of companies. You’ve got the Revolution Ventures fund which is your flagship, and that’s what you said, Series A, Series B?
Sieg: Series A, Series B, typically in the $3-10 million range, historically have done a lot of consumer, but we also do stuff on the enterprise.
Clark: And then you have the growth fund, so that’s making just a few deals per year. What size are those deals?
Sieg: $20-$50 million initial check sizes.
Clark: So the firm itself is pretty much stage agnostic. Goes across the board with the different funds. Does it invest, consumer enterprise, does it invest in anything? Is it just about the opportunity or is there a little bit of a focus?
Sieg: Because of where we’re investing, we have to be generalists by nature, just because of the need to be opportunistic when interesting things come out of more niche geographies. That said, I spend most of my time doing consumer stuff. A lot of brand and consumer, we’ve done a lot in marketplaces. I also do a lot in FinTech and insurance. And then some of my partners spend more time on enterprise stuff.
Clark: So you’re operating out of the … You’re investing out of the Series A, Series B fund?
Sieg: Yeah.
Clark: Okay. So what are you personally most excited about in tech right now?
Sieg: We have been spending … I mean, historically, we’ve done a lot in FinTech and insurance and I think there’s still a lot of runway there. I think the 401(k) space is really murky. We’ve been spending a fair amount of time focusing on that, and in insurance, small business insurance is of interest to us. We’re investors in Policy Genius, which is a direct-to-consumer online marketplace which we’ve seen tremendous growth through, and so we think replicating that on the business side is interesting.
Sieg: In terms of other opportunities, we’ve been spending a lot of time, as has everybody else, on fertility preservation and new parent services. I think our point of view is a little bit different there on the new parent services side, because we’ve done a lot in food investing and see opportunity there. Fertility preservation is a little bit obvious in that 2017 was the first year in recorded history that more women in their 30s gave birth than in their 20s. We’ve seen a lot of interesting plays, but haven’t seen one that we think yeah, that we’re ready to bet on.
I think a lot of the money today goes to the clinics which makes sense, and that is more of a private equity roll up strategy, which we’re obviously not suited to do out of a venture fund. But continuing to monitor stuff on that.
Clark: As you said, you’re here, you’re based in San Francisco. How big is the team here in SF?
Sieg: There are only three of us.
Clark: Okay, so just a few of you guys, but sounds like you travel a lot, you’re making your way around to all these different parts of the U.S., trying to find deals.
Sieg: Yeah. We’re headquartered in D.C. We’ve got about 70 folks back there. San Francisco started really just because my partner, David Goldman, and I both live out here and the trade was being on the plane all the time and that’s fine, but we’ll also have a small San Francisco office. We’ve added another person to the team, VP, Graham Ober, who’s wonderful. Really the evolution of it is that everybody comes through here when they’re fundraising, regardless of where they’re based, so it’s actually more efficient than being in D.C. for top of funnel a lot of the time.
And then in terms of supporting our existing portfolio companies, being able to connect them and really serve as a validator for them to later stage, more Valley-centric funds, is helpful and then as we think about different themes that we’re investing in, investing against, it’s helpful to be informed by what’s going on here.
Clark: So not only are you able to connect them with later-stage funds, but you’re also able to meet with founders when they’re making their way through town it sounds like.
Sieg: Yeah, exactly.
Clark: Why did you or why do you want to be based here?
Sieg: My life is here. It’s pretty simple.
Clark: Yeah, so you’ve been here since Stanford then?
Sieg: Yeah, I’ve been out here since ’04, so it’s been a while.
Clark: Do you think Revolution has plans to double down on their SF presence at all and expand the team?
Sieg: Yeah, I mean we cover it, we don’t need to grow it demonstrably. I think D.C.’s always going to be the real center of gravity for us, which is important because a lot of the industries that we invest in are heavily regulated, and while venture capitalists historically stiff-armed regulators, we think it’s a really critical part to investing and can be a real moat for our businesses. We spend a lot of time focused on policy and helping our companies navigate the regulatory landscape.
Clark: Does Revolution look outside the U.S. at all?
Sieg: We have some Canadian investments. I think it’s covering the entire U.S. is-
Clark: Is a lot of work.
Sieg: A lot of work, so if something gets to us from Europe or Asia, the number of people who had to say no to that opportunity for it to finally show up on our doorstep, because we’re not proactively sourcing there, is kind of amazing. I think low likelihood, but never say never.
Clark: Do you pay attention at all to the rising hubs globally, though? I know you’re looking at Atlanta, Austin, these up and coming areas, but do you notice trends outside the U.S.?
Sieg: Yeah. I mean, look, I think Europe is an incredibly interesting place to invest now. But I also think it’s one where you need to have local expertise and we don’t have it.
Clark: Okay, so transitioning, I want to talk about just the struggles of founders that are in these other markets. Of course what Revolution is doing is great, because you guys are showing up where they are, and you’re letting them pitch to you, you’re investing the seed, which is incredibly helpful to these ecosystems, but a lot of investors that are based in SF want to invest in SF companies. As much as they won’t admit it, I think that’s a pretty true throughout the industry. What do you think about that?
Sieg: I think that’s true.
Clark: Why is it true that they want to invest in local founders?
Sieg: For somebody who’s on a plane all the time, it’s not the most enjoyable thing in the world. Are there definite positives to being able to walk down the street and grab coffee with a founder once a week? Yeah, I don’t think that happens in reality, but the idea of it certainly is great, and the ability to go to board meetings and connect them with other portfolio companies that are right in market, that’s great. I think that’s changing as we talked about, and when you think about the struggles of investing outside of the Valley, I think a key part of scaling companies obviously is hiring and not having enough local talent, and not knowing where to source talent from and how to recruit it is a struggle and a challenge.
But again, I think as the cost of living in San Francisco and New York becomes prohibitively high, we’ve seen more and more talent want to move home or want to move XYZ, and it’s actually a great recruiting strategy for us where LinkedIn is a very powerful tool. You can go on and basically filter by people with connections to said city. We’re in the process of doing that right now, and one of our portfolio companies is in Milwaukee, and they’re getting a great potential candidate who has built a company in Denver and is originally from Milwaukee and wants to come home to start a family.
Clark: Yeah, I think we’re at this interesting moment where of course, we’re seeing the rise in remote work which only facilitates this kind of thing, but because we’re in this I guess moment of transition, I think there’s still a lot of VCs who go by the classic way of thinking which is to invest locally, which is to invest in founders who are in San Francisco, because San Francisco is where it all happens. But then there are a lot of investors who I’ve heard said things like, “We encourage all of our companies to immediately open a second headquarters in an up and coming market, or we even encourage them to get the hell out of San Francisco” because not only can a founder barely afford to live here if they’re early stage, but I mean, think of their employees and think of what they have to pay.
Sieg: And retaining talent is really challenging here.
Clark: It is, it is. It’s as competitive as it’s ever been.
Sieg: Yeah, and I think as more and more Valley-based VCs start seeing their companies opening second offices and spending more time there, you’ll see this flywheel of more capital going outside of the Valley, and we are super excited about that and welcome it, because there are endless opportunities and I think it is one where there are big successes in these regional areas, they splinter off and create more companies and more successes.
Clark: When you’re chit-chatting with other VCs who are also located here in SF, do you tell them? Do you encourage them to look at these up and coming markets and expand beyond what they know in SF?
Sieg: Yeah, and a lot of them are co-investors of ours at the later stage, after we’ve come in.
Clark: Probably the benefit of having you guys here to network around it.
Sieg: That’s part of the thesis around the San Francisco office, but it’s not like we’re some geniuses that are the only ones doing this. There’s definitely more focus on it and a lot of folks are trying and actively sourcing from outside of the valley. It’s just sometimes the bar is higher, whereas for us, it’s kind of the opposite where the bar is higher for us to make a Valley investment.
Clark: We’re almost out of time but I like to ask investors this one question, so I’ll just end with this. Are there any companies that you really wish that you would have invested in, that you totally missed the opportunity to do so?
Sieg: Form a consumer perspective, I wish I had invested in the Series A of Goop, because we looked at it and passed on it.
Clark: Interesting.
Sieg: And I read it obsessively, shop from it obsessively.
Clark: Why’d you pass?
Sieg: I think there were questions around how universally adopted that sort of tone would be, and I think it’s expanded pretty dramatically and really healthily, and health wellness is such a big focus now and it’s something we focused on since day one at Revolution in the way, way back time machine, having invested in things like … Runkeeper, et cetera. But yeah, that’s one that personally I see every day and I’m like, “Ugh.”
Clark: Well, it was great to have you on and thanks so much. Yeah, hopefully we can have you on again next year.
Sieg: Yeah, appreciate it.
Clark: All right, bye.