The first Ask The VC question of 2011 comes from fellow Pittsburgh blogger Jon Cavell: “BurgherJon: @aveeck Ask the VC: What role does place/location (city, state, country) play in a VC’s decision processes?”
Short answer: unlike in real estate (location, location, location…) the location of a startup is far from being a large factor (increasingly so in the modern VC era) for investment by a VC, and certainly it is not a deal-breaker.
It is a tired maxim of the venture capital world that VCs only invest within a one-hour drive of their offices. The theory behind that belief is that a VC needs to be close by, to monitor the growth of the new company they invest in, mentoring the entrepreneurs and hand-holding leadership for the key strategic decisions. That’s the theory, at least. The reality is that VCs who think that way are a part of “old VC”, and the crop of new VCs don’t pay much attention to that maxim.
Entrepreneurs are everywhere, and the smart VC who is investing wisely for their LPs (limited partners) invests in the best deals no matter where they are, and pushes hard for their best portfolio companies to locate in a spot of the world that is the most conducive to the growth of that business (fashion and media in New York, healthcare in Boston, tech in Silicon Valley, etc).
I won’t deny that there are some big name, blue-blood VCs who might push hard for a startup to move near the VC, especially if the VC is in one of the larger startup hubs. Just recently, Pittsburgh lost two high-profile startups (ModCloth and Lockerz) after very prominent CA-based VCs made large investments in them. But I think the stories behind those departures are likely more complex. ModCloth has a need to be in CA for the LA-based fashion scene, and Lockerz needs to have a HQ that screams meaning to their user base, generation Z (they moved to Seattle, the former homebase of their founder). Both companies are rapidly growing tech companies that need access to world-class coders – and I just don’t think Pittsburgh has, or is retaining, that population in great enough numbers yet.
There are good examples to highlight the modern VC approach. Another Pittsburgh startup, Avere Systems, took CA VC capital and is cranking away right here in Pittsburgh where it started, as are several other Pittsburgh-based companies I know. And you can look to the large examples of Groupon in Chicago (Accel) and myYearbook in New Hope, PA (USVP). Take a look at the portfolio of Union Square Ventures out of New York, or First Round Capital out of Philly, and you will see that the most successful of the new VC crop go to where the great invests are.
Of course, these are just one-off examples – hard data will either refute of support the trend. I will keep my eyes peeled to see if I can find some more data to write about later.
So focus on what matters most in your business – your product, your team, and your market – and don’t worry too much about being located someplace other than NYC or Silicon Valley. If you are good, VCs will find you, trust me.
- Ask The VC – Venture Backed v. Self-Funded (pittsburghventures.com)
- Ask The VC – please send your questions! (pittsburghventures.com)
- Ask The VC – 1st Installment (pittsburghventures.com)
- Know Each Firm’s Focus (markpeterdavis.com)